The U.S. credit rating has been downgraded again, and the U.S. debt market will usher in the riot moment in 2011?
In 2011, after S&P downgraded the U.S. credit rating, U.S. stocks suffered a sharp selloff, and the S&P 500 index fell by more than 7% that day. U.S. bonds also experienced a big sell-off, pushing the 10-year U.S. bond yield up sharply by 16 basis points.
However, regarding the market reaction after Moody's downgraded the US rating, Jim Bianco, a Wall Street veteran and president of Bianco Research, believes that this rating downgrade may become a performance of "nothing happens", and the actual impact on the market may be "insignificant".
He believes that after S&P downgraded it in 2011,The panic in the market is that US Treasury Bond may no longer qualify as eligible collateral, and many institutions are forced to sell US debt。 Bianco says:
After 2011, these contracts were re-written to adjust the requirements for securities to "government securities", removing specific eligibility requirements for credit ratings, and rating changes would no longer trigger coercive measures or selling. So it doesn't force anyone to do anything on Monday and nothing changes.
Why did 2011 trigger market panic?
Back in August 2011, when S&P first downgraded the United States from AAA to AA +, the market experienced a moment of panic, especially the U.S. debt market once suffered a sharp selloff.
On the day of the downgrade, the 10-year U.S. bond suffered a sharp sell-off, with the yield rising by 16 basis points, while the yield of the 2-year U.S. bond rose by 3 basis points first.
Regarding the sharp selling in the U.S. bond market in the early stage, Bianco posted on social media that the reason why the sky fell at that time was that a large number of derivative contracts, loan agreements and investment orders prohibited the use of any non-AAA securities.
"The fear at the time was that U.S. Treasury Bond might no longer qualify as qualifying collateral, which could lead some to breach investment orders or fall into technical default."
In other words, in 2011,Many institutions were forced to sell U.S. debt, triggering a moment of panic in the U.S. debt market。
It is worth noting that after the initial surge, the yield on 10-year U.S. bonds fell sharply by 56 basis points in a month, from 3% to 2.1%. The 2-year U.S. Treasury yield fell by 9 basis points in a month. According to the analysis, there are three main reasons:
Although the downgrade is negative for the U.S. bond market, investors snapped up U.S. bonds instead driven by safe-haven demand, which is why the yield of 10-year U.S. bonds dropped sharply in the following month.
At that time, under the background of the global economic slowdown and the aftermath of the European debt crisis, US debt was still regarded as the safest liquid asset.
After the downgrade, investors expected the Federal Reserve to further loosen its policy to hedge the impact of the rating, so they bought bonds one after another, which also depressed the yield of U.S. bonds.
It's a lot different now
The problems with U.S. bond yields that arose on the day of the downgrade in 2011 are no longer there, becauseThe system has been completely adjusted and rating changes will no longer trigger coercive measures or selling behavior。
According to Bianco's analysis:
"After 2011, these contracts were re-written, adjusting the requirements for securities to" government securities ", removing specific eligibility requirements for credit ratings.
It is because of this change that when Fitch downgraded the U.S. to AA + in August 2023, it had little impact on the bond market. "
Finally, Bianco said that technically, Moody's downgrading the U.S. credit rating didn't even change the overall credit rating of the United States, because the U.S. rating was originally divided into AA + before, but now it is uniformly rated AA +.
