Threat of $100bn hit if US top rating lost
Comment of the Day

June 28 2011

Commentary by David Fuller

Threat of $100bn hit if US top rating lost

My thanks to a subscriber for this informative and topical article (link may require subscription registration, PDF also provided) by Michael MacKenzie for the Financial Times. Here is the opening:
Investors in the US government bond market could face losses of up to $100bn if the largest economy loses its triple A rating, according to a research arm of McGraw-Hill, the parent of Standard & Poor's.

A ratings downgrade that results in higher bond yields and lower prices could also mean the US Treasury paying $2.3bn-$3.75bn a year more in interest on financing a $1,000bn annual budget deficit.

"If Standard & Poor's or any of the other major rating agencies downgrade the US, Treasuries would likely drop in value, possibly by as much as $100bn," said analysts at S&P Valuation and Risk Strategies, a research team separate from the agency.

Currently, Treasury yields do not reflect concern about the US losing its top rating. The yield on 10-year Treasury notes fell to 2.85 per cent on Friday, a low for the year. Investors are concerned about a weaker economy and financial contagion from the euro debt crisis. Yields on four-week Treasury bills have been driven below zero.

While the threat of a US downgrade is remote, it remains a possibility given the projections of large long-term deficits and the impasse over raising the $14,300bn Treasury debt ceiling.

In April, S&P affirmed its US rating but revised its outlook to negative because of the deficit and the risk that it will not be cut meaningfully by 2013.

Moody's has said it could place the US government on review for downgrade if there is no resolution of the impasse over raising the Treasury debt ceiling before the August 2 deadline.

David Fuller's view The USA will probably not lose its triple A debt rating but to ask the rhetorical question: will that be due to economic or political reasons?

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