Prediction: a US Debt downgrade impact [updated]

If the Japanese story is one to go by, and so far it is, a downgrade of US debt by rating agencies will have hardly any impact. I don’t see what information the rating agencies have that everyone else doesn’t already have and despite tough economic times, I don’t see the US defaulting anytime soon.

Prediction: If the US debt is downgraded in the next 6 months, yields won’t increase by more than 0.2% 6 months after the downgrade. In other words, there might be a small, temporary uptick, but within 6 months yields will have returned to below 0.2% above the day before downgrade.

[update: The US has now been downgraded from AAA to AA+ on 5 August 2011. 10 year yields are 2.56% after a significant drop over the last few weeks from already low levels. We’ll have to see whether come 5 February 2012 10 year US yields are above or below 2.76%]

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.