Thursday, July 18, 2024
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Why it matters if the US credit rating is downgraded – again

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If the country’s credit were to be downgraded again, it would result in “an increase in yields on Treasury securities,” Snyderman said, with investors demanding higher premiums. “When we see higher yields on short-term securities, it immediately raises the cost of borrowing for the US government, which we know is borne by US taxpayers when we have to service our debt,” he said. to continue.

Mark Zandi, chief economist at Moody’s Analytics, also noted that other bonds and loans are “inherently backstopped” by the federal government, as are many institutions – for example, major banks like JPMorgan Chase, Fannie Mae and mortgage financers. companies Freddie Mac, and municipal governments. “If the US government is downgraded, that will set off a cascade of downgrades because those entities are backstopped by the federal government. And that clearly sends a very strong signal to investors,” Zandi told me. . (While Moody’s Analytics, a subsidiary of Moody’s Corporation, is not involved in credit rating determinations.)

Zandi warned that investors could be forced to sell their bonds at a loss, which would in turn prompt them to sell more bonds to cover those losses, creating a “doom loop” of sorts. Will go “At the same time all this is going on, interest rates are rising, stock prices are falling very rapidly,” he said. “So you really don’t want to go down that road. It’s a very dark road.”