By Michael MacKenzie in New York
Investors in the US government bond market could face losses of up to $100bn if the largest economy loses its triple A rating, according to a research arm of McGraw-Hill, the parent of Standard & Poor?s.
A ratings downgrade that results in higher bond yields and lower prices could also mean the US Treasury paying $2.3bn-$3.75bn a year more in interest on financing a $1,000bn annual budget deficit.
?If Standard & Poor?s or any of the other major rating agencies downgrade the US, Treasuries would likely drop in value, possibly by as much as $100bn,? said analysts at S&P Valuation and Risk Strategies, a research team separate from the agency.
Currently, Treasury yields do not reflect concern about the US losing its top rating. The yield on 10-year Treasury notes fell to 2.85 per cent on Friday, a low for the year. Investors are concerned about a weaker economy and financial contagion from the euro debt crisis. Yields on four-week Treasury bills have been driven below zero.
While the threat of a US downgrade is remote, it remains a possibility given the projections of large long-term deficits and the impasse over raising the $14,300bn Treasury debt ceiling.
In April, S&P affirmed its US rating but revised its outlook to negative because of the deficit and the risk that it will not be cut meaningfully by 2013.
The S&P analysis calculates a reduction to AA and A would spark a decline of 2 per cent and 3.2 per cent respectively in the price of the 10-year Treasury note, sending yields higher.
The price of the 30-year bond would drop by 3.9 per cent and 6.3 per cent under these scenarios. The analysis focuses on Treasury debt with a maturity longer than two years as this sector is least affected by the Federal Reserve?s near zero interest rate policy. As such, the estimate of costs associated with a downgrade is considered conservative.
? The Financial Times Limited 2011