Chart of the Evening

27 Jul

Before I get into this I would like to say I am exceptionally worried about the repercussions of the treasury failing to be able to make good on its payments at some point next week due entirely to political posturing. Though I would put a near zero chance on a UST missing a coupon, the willingness of payment on non-bond treasury obligations is already damaged goods and if there is not a plan in place to raise the ceiling this week, it will be an exceptionally ugly set of circumstances for everyone.

However, the chart I chose to bring attention to this evening is important because a seemingly endless string of yapping idiots continue to contend that an S&P downgrade to the long term debt of the US would be catastrophically problematic for interest rates.  Zerohedge today went so far as to tweet “@zerohedge: For all those saying a US downgrade would have no impact on anything, please cite one historical precedent.”

Luckily for all of us the rates team at Nomura did just that and from the look of things every historical precedent seems to prove that an S&P AAA downgrade is the bell rung for govvie buyers to re-enter the market.


9 Responses to “Chart of the Evening”

  1. Kid Dynamite July 27, 2011 at 10:18 pm #

    interesting, and yet, I think one could make the argument that a USA downgrade would be significantly different from a downgrade of any of the countries listed on that chart. .Belgium we are not…

  2. Dutch_Book July 27, 2011 at 10:30 pm #

    Yes every situation is different, but I think forced downgrade selling would be minimal. Most of the buy sides we deal with have put dedicated legal teams to work over the past month, that are entirely devoted to how to sidestep this issue in their mandates.

    Rating agencies in the sov space have served more as reactionary PR departments over the past year than anything else. Hard to imagine their influence in the deepest most liquid market in the world will hold a great deal of sway.

  3. ComfortablySmug July 27, 2011 at 10:31 pm #

    As FT Alphaville noted here “hedge funds are stockpiling cash so they can buy up United States debt if other investors flee” which supports Dutch Book’s case.

  4. ComfortablySmug July 27, 2011 at 10:36 pm #

    Also, RE: Lawyers working on the case, as The Economist noted here, “investment boards are likely to approve requests to rewrite their covenants, especially if a lower rating looks temporary. “It would be a full-employment act for lawyers,” says Lou Crandall of Wrightson ICAP, a research firm.”


  1. This Is The ULTIMATE Reason Not To Fear A Ratings Downgrade | Brian Brown's Official Website - July 28, 2011

    […] at Stone Street Advisors, @dutch_book posts this great chart from Nomura showing the average impact on 10-year yields from […]

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    […] has happened historically when a sovereign loses its AAA rating.  (Stone Street Advisors via Money […]

  3. Perdre son AAA : baisse du taux actuariel ? | The Daily Swan - July 28, 2011

    […] publie aujourd’hui un graphique intéressant qui confirme qu’une dégradation de la dette d’Etat n’est pas « catastrophique pour les taux d’intérêt », bien au contraire (cf. article précédent). L’équipe taux de Nomura fait la moyenne de la totalité des évolutions des taux après une perte d’un AAA. […]

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    […] interesting chart from Stone Street Advisors shows us what has happened to interest rates historically when a sovereign nation has been […]

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