A one-notch downgrade would not cause forced selling of USTs. Still, there could be a re-pricing, with UST rates rising by 25bp or more in long maturities
GSEs debt would also be subject to downgrade along with USTs. Agency securities are widely held by high credit quality investors, particularly foreign Central Banks (USD 734bn), and there are likely to be very few forced sellers. Over time, we expect investors will diversify where possible to other AAA-rated paper, resulting in wider agency debt spreads to USTs, with longer-duration, less-liquid paper coming under particular pressure
The unsecured Fed funds market is likely to escape the downgrade unscathed, but repo rates and margin requirements are headed higher, as the large providers of cash and credit demand slightly higher haircuts for downgraded collateral. But as far as we know, the Federal Reserve is not increasing their haircuts on Treasury and Agency securities, and that should provide an anchor to the market
Ratings for Aaa munis directly linked to the government are likely to move in tandem with the US rating, leading to some selling for liquidity purposes, but forced selling is not expected
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