Moody's Downgrades US Credit Rating, Market Impact Minimal

Moodys has downgraded the United States' AAA credit rating, but this time it is significantly different from the situation in 2011. The downgrade is expected to have minimal impact on the U.S. debt market, as institutional changes have been made since the last downgrade. In 2011, the market panic was due to the possibility that U.S. Treasury bonds might no longer qualify as eligible collateral, forcing many institutions to sell their holdings. However, current regulations have been adjusted to prevent such forced sales, making the impact of the downgrade less severe.

In 2011, when Standard & Poor's downgraded the U.S. credit rating from AAA to AA+, the market experienced a panic, particularly in the U.S. Treasury bond market. On the day of the downgrade, 10-year Treasury yields rose by 16 basis points, and 2-year Treasury yields rose by 3 basis points. The panic was due to the fact that many derivative contracts, loan agreements, and investment mandates prohibited the use of securities that were not rated AAA. This fear led to a significant sell-off in the U.S. Treasury bond market, as many institutions were forced to sell their holdings to avoid violating their investment mandates or falling into technical default.

However, the situation has changed significantly since then. In the aftermath of the 2011 downgrade, many contracts were rewritten to require "government securities" instead of specifically rated securities. This change means that a downgrade in credit rating will no longer trigger mandatory sales or other forced actions. As a result, the recent downgrade by Moody's is expected to have little impact on the U.S. debt market. In fact, the overall credit rating of the U.S. has not changed, as it was already rated AA+ by other agencies.

Jim Bianco, a veteran Wall Street analyst, believes that the recent downgrade by Moody's will have minimal impact on the U.S. debt market. He notes that the market panic in 2011 was due to the possibility that U.S. Treasury bonds might no longer qualify as eligible collateral, forcing many institutions to sell their holdings. However, current regulations have been adjusted to prevent such forced sales, making the impact of the downgrade less severe. Bianco also notes that the recent downgrade by Moody's has not changed the overall credit rating of the U.S., as it was already rated AA+ by other agencies.

In summary, the recent downgrade of the U.S. credit rating by Moody's is expected to have minimal impact on the U.S. debt market. Institutional changes made since the last downgrade have prevented the possibility of forced sales, and the overall credit rating of the U.S. has not changed. As a result, the market is expected to remain stable in the aftermath of the downgrade.