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  • xraythrives xraythrives Aug 5, 2011 11:55 PM Flag

    US debt

    Take a bow. You were right. But I am not that impressed. It was a widely disseminated rumor

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    • Disseminated widely enough that the news might not even cause a selloff on Monday.

      Mainly I think the hip theory is that treasury rates will actually fall. Why? Well much of the debt is held by trade partners like China that need to continue buying it for trade balance purposes (unless they are willing to allow their currencies to appreciate wildly against the dollar). However, with the perception of increased risk for US businesses, some institutions will undoubtedly sell equities and then put some of the cash into bonds. Since Everyone believes US will print cash before actually defaulting, US treasuries will still perceived as safe after the downgrade and thus they will be bought up. Unless the rate of bond issuance increases, rates will fall.

      When 10yr rates hit ~2.5%, IMO the bottom of the market will be in. Dollars will move from bonds to equites again.

      Anyway, the joint statement out from the Fed should help minimize the market freakout from the downgrade:

57.11-0.49(-0.85%)Apr 28 4:00 PMEDT