Analysts downplayed the Standard & Poor's
downgrade of U.S. debt over the weekend pointing out markets have been bracing for the action for some time.
Meanwhile, the credit rating agency acknowledged its own faulty calculation of future debt levels in the U.S.
On Friday, the credit rating agency downgraded U.S. debt to double-A-plus from the gilt-edged rating given to the nation in 1941. Moody's Investors Service
has affirmed the triple-A rating it first assigned to the country in 1917 and Fitch Ratings
followed suit, though both have a negative outlook on the rating.
"While this is a significant announcement for political and historic reasons, the actual impact of a rating change on the U.S. Treasury market should not be significant," Barclays Capital
S&P stressed much of the cause for the downgrade was indeed political. Analysts at the ratings agency pointed to the chaos circling the usually routine debt ceiling negotiations, however, they said the eventual deal fell short of addressing the debt level crisis of the U.S.
When S&P presented its findings
to the Treasury Department
Friday morning, it originally reported near-term government debt to reach $14.7 trillion or 81% of GDP by 2015.
By 2021, S&P calculated the U.S. debt level may reach $22.1 trillion or 93% of GDP.
Treasury officials pointed to severe miscalculations, and S&P revised its figures to a debt level of $14.5 trillion or 79% of GDP by 2015 — a $345 billion correction.
The overshoot of long-term debt was more severe. S&P revised the debt level through 2021 to $20.1 trillion or 85% of GDP, a $2 trillion miscalculation.
"None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision," S&P said.
The investment bank BlackRock (BLK)
said it has been preparing for a downgrade over the past month. A task force at the firm reviewed all aspects of its business related to U.S. Treasurys and related securities to develop "a detailed game plan."
"We think it is vital to underscore the fact that the U.S. Treasury sector (and to a slightly lesser extent agency-backed MBS) remains the largest and most liquid fixed-income market in the world with the greatest degree of price transparency and few genuine alternatives," BlackRock said. "While the events that led to the S&P downgrade are certainly of concern, we think the vast majority of investors will continue to utilize the Treasury yield curve as an effective credit risk-free benchmark against which credit spread issues can be judged."
Analysts at JPMorgan Chase (JPM)
said agency mortgage-backed securities, those guaranteed by Fannie Mae
and Freddie Mac
, will see little disruption in cashflow as a result of the downgrade.
"We believe that agency MBS investors are entitled to the underlying cashflows of the mortgages, and then become general creditors to the GSEs after any shortfall," Chase analysts said.
Investment bank Keefe, Bruyette, and Woods
said the downgrade would have "limited impact" on real estate investment trusts betting on MBS. Analysts there said the book values of MBS will likely not be impacted, REITs have excess capital to "comfortably cope" with a drop in market value and most of these firms use funding timelines of 30 days or longer, shielding them from near-term volatility.
"Most importantly, we believe that this downgrade will make the risk free market a AA market (since corporate and structured AAAs will still trade at a spread to Treasuries and Agencies). As a result, we don't think haircuts or funding costs on Agency MBS will change materially over time," KBW said.
The largest impact would appear to those not protected from near-term volatility, both in the MBS market via initial spread widening and in the already skittish stock market. A little more than one hour into trading Monday, the Dow Jones Industrial Average was down more than 350 points.
Write to Jon Prior
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