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S&P Downgrade Effects

Well. It finally happened, the first time since 1917. US Treasuries are at AA+.

This has some serious implications. Many funds/companies worldwide have depended on Treasuries as collateral since they are required to use AAA securities; with the downgrade, we're looking at a rapid sell-off. What does Quantnet envision as happening on Monday and in the longer, but still short, term.
 
http://www.nationalreview.com/corne...ote-against-raising-debt-limit-andrew-c-mcca#
From Sen. Obama’s Floor Speech, March 20, 2006:
The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.
At the time, Senator Obama was urging Congress not to tolerate an increase that would bring the debt ceiling to $9 trillion. Under President Obama, the debt ceiling has been raised to $14.3 trillion. Even without counting most unfunded liabilities, the national debt is now calculated to be nearing $14.1 trillion. It increases about $4.22 billion per day (each citizen’s share stands at roughly $45K). Thus, Democrats will soon demand that the debt ceiling be raised, lest the sky fall. When they do, they will be asking for a significant boost in a ceiling that is already 60 percent higher than the one Barack Obama said was “a sign of leadership failure” five years ago.
 

AndrewChang

Baruch MFE Alum
Well. It finally happened, the first time since 1917. US Treasuries are at AA+.

This has some serious implications. Many funds/companies worldwide have depended on Treasuries as collateral since they are required to use AAA securities; with the downgrade, we're looking at a rapid sell-off. What does Quantnet envision as happening on Monday and in the longer, but still short, term.

Not like the fact that US is sinking is new news to anyone. When I believe S&P downgraded GE, Berkshire (and I think like 60 other companies) etc rating from AAA to AA, their yield actually went down afterwards signaling markets were ahead of the rating agencies in lowering the companies ratings. I believe the same might be true about the US treasuries even though the risk free rate of choice still is the US debt.
 

Lyosha

Psychic in Training
Ratings agencies are historically far behind the market.

However, there will be positions that are forced to liquidate come monday which will see the yield rise in the short term.
 

bob

Faculty (Undercover)
It's a very strange time, that's for sure. I think those here who are opining that the market has "priced it in," the rating agencies are somehow late to the party, and capital markets have the whole thing under control may be parroting a party line that doesn't apply in this instance.

The truth is that, between this and the latest intensification of the European debt crisis, funding markets are ceasing to function. It is a lot like 2008 in that you can basically be sure that, if the big shock comes, both you and all of your counterparties will incur losses, but nobody is sure how much and of what kind and who will get hurt the worst. In that atmosphere, funds are preparing for the wave of redemptions that will arrive, as usual, at precisely the moment when they have least idea of what their assets will be worth. BONY-Mellon has as much as come out and said that they don't want deposits. The 1W bill issued last week priced at zero yield. There is a profound effort to deleverage in preparation for a shock of unknowable proportions. To me, what we've seen happen recently with Treasury yields is more a matter of "in the land of the blind, the one-eyed man is king" rather than any sense in which the US's fiscal problems have been digested or accepted.

As for the downgrade specifically, I'll be interested to see what the ripple effect is in the agency RMBS market, and the knock-on effect in the residential market. The Treasury guarantee there has only ever been implicit, meaning that the logical effect would be for yield spreads there to rise. In a reasonable world, the falling rates at the long end combined with the higher spreads demanded by investors would cause new issuance in this market to drop, hurting RE prices in the process, but then again the Treasury has persisted in doing things that make no economic sense from a market standpoint in order to prop up real estate, so who knows? They would probably continue issuing even if we reached the superlatively bizarre situation where the credit spread demanded on mortgages falls below that demanded on the passthroughs.

Anyway, everybody get your helmets. It could get a little rough here for a bit.
 
I applaud the downgrade as a clear message to those in office that we need to reign in spending and fix our deficit, I think this is rather silly. All this bickering about the debt ceiling and people failed to realize that a downgrade was possible regardless of it passing or not. Monday should be very interesting.
 
Anthony DeAngelis

All this bickering about the debt ceiling
I think this has been the thing that has been the most frustrating about the whole situation. Watching posturing politicians use the situation as a political football, and a complete lack of any leadership in the situation.
 
However, there will be positions that are forced to liquidate come monday which will see the yield rise in the short term.

Maybe, maybe not. Every June there is an incident known as the Russell Shuffle - when a large number of names are added or dropped from the index. This tends to constitute the largest trading volume day of the year.

For traders, some years it's like christmas in June and some years its much ado about nothing. This is largely driven by expectation and liquidity.

In this case, the downgrade possibility was highly anticipated and treasuries are rather liquid. I suspect the big players already have a contingency plan in place and any noise will be quick and temporary, driven mostly by non-institutional players dead-cat bounce-style.

In any event, thats my $0.02 CAD :)

Next week should be interesting indeed.
 

Eugene Krel

sunmulA
Friday we saw approximately twice the usual volume in interest rate futures on a non-farm payroll day. This was before CME markets closed and S&P made their announcement.
 
I think this has been the thing that has been the most frustrating about the whole situation. Watching posturing politicians use the situation as a political football, and a complete lack of any leadership in the situation.

Particularly from this pathetic excuse for a president. But it seems that virtually all American politicians are abysmally ignorant of even rudimentary finance and economics. Wouldn't be in the least surprised if half of Congress had not hitherto heard of S&P credit ratings, or how this has real-world effects. They're living in cloud-cuckoo land.
 
Does anyone have any idea of the impact of such decision on the job market ? I know that most banks are firing but from what I had heard, they were still planning on hiring. What about now ? I guess it will be very difficult to find a job in the next few months.
 
Particularly from this pathetic excuse for a president. But it seems that virtually all American politicians are abysmally ignorant of even rudimentary finance and economics. Wouldn't be in the least surprised if half of Congress had not hitherto heard of S&P credit ratings, or how this has real-world effects. They're living in cloud-cuckoo land.
Yes. The layman is incompetent. The following is an actual reply I got to one of my facebook statuses:

There is a reason the national debt isn't too bad. If we actually balanced our budget every year, we would be able to continuously take out new loans for as long as we wanted to.

I hate when people compare the U.S.'s debt to their own, because it's not at all the same. Without the downgrade, our interest rate will never increase, so just having the debt is perfectly fine as long as something like this doesn't happen.

I especially liked "Without the downgrade, our interest rate will never increase" I guess the 80's just never happened.
 

Joy Pathak

Swaptionz
Friday we saw approximately twice the usual volume in interest rate futures on a non-farm payroll day. This was before CME markets closed and S&P made their announcement.

Did anyone else notice anything else interesting like this last week? I mean lot's of stuff happened last week. But what other observations did people see ?
 
Does anyone have any idea of the impact of such decision on the job market ? I know that most banks are firing but from what I had heard, they were still planning on hiring. What about now ? I guess it will be very difficult to find a job in the next few months.
The students who start in the Fall probably will secondguess their timing and decision ;)
I don't believe anyone is saying the job outlook is bright in the near future.
 
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