There is a well known corrolary in the bond market that says cities, or municipalities cannot be graded higher than the country they reside in. Now that S&P has established a downgrade for the US from AAA to AA+ on August 5th, the next two sectors on the docket for downgrades are municipalities and financial companies.
Shortly after the US was downgraded on Friday night, Matt Fabian of Municipal Market Advisors came out and stated that there are hundreds of municipalities that are setup for a downgrade, and judging by the number of cities that have recently filed, or plan to file bankruptcy in America, this assessment is not far off the mark.
While the impact on Treasurys as a result of the downgrade may be limited (after all the other side of the Atlantic is about as ugly as the US, so where could $8 trillion in marketable USTs practically go... at least for now), the same may not be said about the far smaller, $2.9 trillion municipal market, which is about to see a blanket downgrade tomorrow as S&P warned on Friday night, and of which Matt Fabian of Municipal Market Advisors earlier said that "There will be hundreds and hundreds of municipal downgrades, which will not do well to bolster investor confidence." The scary bit: "Treasuries may be able to shake off a real impact from the downgrade. Munis I’m less sure about." - Zerohedge
So far in the markets, the first part of this observation is correct. In Asian and European trading on Sunday, August 7th, the ratings downgrade did not hamper the treasury markets very much, as many investors still purchased US debt instruments in the wake of their own economic crises.
So while initially, it does not appear that the US bond market has been hurt due to the S&P downgrade, another side of the market may instead be at the forefront of the destructive consequences of Friday night's actions. On August 8th, analysts began to take a serious look at what the repercussions of Friday's downgrade will do on the equities markets, and early conclusions show that a prime area for liquidation will be the financial and bank stocks.
…according to Reuters Insider: "Announcements should be expected this morning about effects to corporations from S&P’s downgrade of U.S. credit rating, David Beers, head of S&P’s sovereign ratings." This means financials, the corporate group most at risk to the US downgrade, are about to be shellacked. And, as we pointed out previously, a 2 notch downgrade in Morgan Stanley will result in a $1.4 billion margin call. We haven't done the math on the other TBTFs but something tells us Bank of America is in the same boat - Zerohedge
So as many analysts placed their primary focus on the US Treasury and Bond markets over the weekend, it appears that the real effects of the downgrade will be on secondary markets such as Municipal bonds and financial stocks. The reverberation of this over the next few days will cause minimal effect on government debt, but will instead create large ramifications for the American people at large. The public can rightly start to see price inflation, austerity cuts in their local areas, and soon to be higher interest rates on bank loans and mortgages.
The US government has moved its focus over time from local economies to issues dealing with the global markets. The criticism shown by White House officials, Treasury Secretary Timothy Geithner, and even billionaire Warren Buffet after S&P's downgrade are rebuttals directed at protecting the US's sovereign debt globally, and has little focus on what is about to take place in the US economy.
Three days after S&P made their historical ratings downgrade on the United States, the early consequences of those actions are starting to appear in the public arena. Upcoming downgrades of municipalities and financial institutions will carry many more consequences for the American people, than it will for US debt instruments sold to the global community.
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