Quote:
Originally Posted by giver99
And further to this, treasuries are often used as collateral for margin accounts, swap markets and other short-term funding. This changes if the USA downgrades to AA. Anyone at the edges of a levered position would be forced to post more collateral or sell assets to meet margin requirements.
Many money market funds are often predicated on AAA-rated securities being used in the transaction (by contract or by prospectus). This action could lead to a freezing of short-term funding markets, same problem we had in 2008.
Life insurance companies own a ton of long government paper because it's AAA-rated. Not clear to me that this is a non-event, more likely the elephant in the room.
|
Likely anyone managing fixed income funds with stipulated weighted average weightings would be forced to actually buy more US Treasuries and to sell their riskier assets to maintain their averages. This would be a forced 'flight to quality.'