US Credit Rating Downgraded By Standard And Poors Rating Agency

As the world is now aware, Standard and Poors has downgraded the US credit rating to AA+, down one notch from AAA.

This is the first time in history that this has happened and is surprising.

The big question is, "How are the markets going to react?"

Well, the credit worthiness of the USA government to pay their debts is less than it was. If this was another country, or a company, that would mean that the interest rates they had to pay to borrow money would rise.

Rising interest rates would cause bond prices to fall. In all the nations who have experienced downgraded credit ratings, especially the recent ones like Greece, Portugal, Ireland, etc, the interest they have to pay on new bonds has risen dramatically, especially in Greece where 2 and 10 year yields are now in the teens!

In the case of the US market, first of all, the credit rating hasn't dropped anywhere near as low as Greece, so don't expect a massive spike in interest rate yields on bonds.

However, the yields will likely rise, and could therefore result in bond prices falling, resulting in TLT falling and therefore TMV and TBT rising.

The big difference though, is that the USD and US treasuries are still the biggest, most liquid market in the world, and this is just a credit rating from one company. Moody's and Fitch, which are also credit rating agencies, still have AAA ratings for the US.

Therefore, international investors, especially countries like China, Germany, Japan etc, still have a lot of money they need to park someplace, and all want the USD to rise, so could easily ignore the credit rating and continue to pump money into bonds, therefore, continuing to rise the bond prices, and hence TMV and TBT could still fall.

The markets have been gripped by fear for over the past two weeks. Despite the extremely strong fundamentals right now on the SP500 stocks and higher than expected earnings in the current earnings season, the market has had one of it's biggest drops in the past few days.

It has basically been a tug-of-war between logic and fear....and fear has been winning.

One things for sure, its an exciting time to be trading the markets. Once the fear and chaos subsides, like it did after the 2008 crash, logic will return, and the opportunities will likely be amazing!

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