US loses AAA credit rating after S&P downgrade

[lou]

One of the world's leading credit rating agencies, Standard & Poor's, has downgraded the United States' top-notch AAA rating for the first time ever.

S&P cut the long-term US rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits.

The agency said the deficit reduction plan passed by the US Congress on Tuesday did not go far enough...


http://www.bbc.co.uk/news/world-us-canada-14428930

Good time to be in cash :cool:

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so who knew this before the announcement ? I saw a few tweets about rumours, it would be interesting to have an all seeing eye and know to what extent this was insider traded !


The way I see this is that risk just got added to the largest investment class in the world. One that previously was considered risk free. US T-bills. Which could mean that everything else also just got riskier as well. This seems the immediate conclusion but actually it might just mean that US T-bills have now moved into another category in the company of different investments. Whats the problem with that then? And the real market had priced it in already, right?
Maybe, but... the sheer size of the market may mean its not quite that simple.
Could it be that huge volumes of US govt short term securities are now unleashed into the market because for many large players there are mandatory requirements to hold a percentage of their investments at the risk free rate (as a counterbalance to their risky investments)? I'm not sure if the drop from AAA to AA+ is enough to do this and for how much, but it could be an issue. If it was on a big enough scale you'd see interest rates rise across the board in US and other govts bonds who are still rated AAA) be in demand and rise in price (lower interest rate).
Those are my musings for now, am interested to hear what others think

[Skol]

The Japanese Treasury says it will make no difference to them and they owns heaps of US Treasuries.

[Lizard]

Peat, I don't think there'd be many on ST game to respond to points you raise, but you might find this article interesting:
http://latimesblogs.latimes.com/money_co/2011/08/us-credit-debt-rating-qa-aaa-aa-stanard-poors-markets-interest-rates.html

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ok thats interesting as an official line
but is it likely they will come out and say we need to sell x% of our US bill holdings before they do it

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thanks Lizard
like that summary, which is mostly smoothing the points I raised eg

Also, although S&P cut its long-term-debt rating for the U.S., it maintained its separate rating on short-term debt at the highest grade. That means the $2.6-trillion money-market mutual fund industry wouldn’t have any reason to bail out of short-term Treasury issues.


Ironically, the U.S. downgrade “is more likely to lead to a sell-off in risk assets than a stampede out of Treasuries,” said Mohamed El-Erian, head of money management firm Pimco in Newport Beach.

In any case the way I see it , a very very large market of what has been considered risk free has now officially had a risk assoc'd with it
it must trigger some degree of a flight to quality

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http://seekingalpha.com/article/285296-strange-day-followed-by-strange-night-what-now


http://seekingalpha.com/article/285308-5-things-you-should-know-about-the-s-p-downgrade

this guy seems to have my concerns
http://seekingalpha.com/article/285291-u-s-downgraded-by-s-p-we-re-aa-now

but others shrug

The bond market is the ultimate bond rating agency. The only rating that matters is the yield demanded by bond investors.

Right now that yield is unequivocally saying that the USA is not going to default.

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Robert Peston Business editor, BBC News

The US losing its AAA rating matters. It is a very loud statement that there has been an appreciable increase in the risk - which might still be tiny, but it exists - that the US might one day struggle to pay back all it owes. Another important certainty in the world of finance has gone.

Of course many will argue - and already have - that the record of ratings agencies such as Standard & Poor's of getting these things right in recent years has been lamentably poor. Think of all the subprime CDO products rated AAA by S&P that turned out to be garbage.

But S&P, Moody's and Fitch (and particularly the first two) still have a privileged official position in the world of finance: they determine what collateral can be taken by central banks from commercial banks, when those central banks lend to commercial banks.


whereas

http://seekingalpha.com/article/285311-u-s-downgraded-what-to-do-now

says


The net effect of the downgrade being less than what was expected by some and surprise to about 30% of market participants is likely to be a wash. (i.e he things no change)

At the first glance, it would seem that the U.S. treasury bonds, now with a lower rating, should fall. But in reality, the opposite is a possibility. The reason is that a downgrade will provide more momentum to fiscal austerity in Washington. Fiscal austerity in the short-term means a slower economy. Slower economy means higher bonds.

So, certainly different opinions out there