That'll be the day....

Wow!

Reuters: US AND UK "AAA" RATINGS "BEING TESTED" BECAUSE OF SHOCK TO GROWTH -MOODY'S

My friend Priya seemed really alarmed by this... due mostly to a misunderstanding where she thought this was for corporates. Which led to the following fun exchange:

me:
"I'm not sure how much impact a downgrade of treasuries would have on the
corp CDS market. A little for sure but... I don't think much else. And
Treasuries are held mostly by sovereigns (as reserves), I think, and I
don't think they care particularly what moody thinks. Plus, as the
Chinese have pointed out, you don't have much else of an option. What're
you going to hold, sterling? Bund auction failed yesterday so that
doesn't seem too smart to hold either.

Imagine US treasuries got downgraded? I mean, makes sense but..."

Pri:
"the chinese are in for deep trouble!"

me:
"Well yes and no. I mean... they can afford to just keep holding those Treasuries till maturity so they're not _actually_ losing money. In the meantime, as Treasuries trade down they'll "lose" reserves (b/c the T-bills they hold trade as less) but as we move closer to maturity those same T-bills will trade back to par. And I don't think they care _that_ much whether they 'lose' a few billion b/c of what essentially just amounts to mark-to-market accounting. Unless, that is, the US is insolvent in 30 years and can't pay anyone back and also not get new debt, hahaha, errrr...."