Downgrade Threat
A ratings downgrade remains possible if Washington fails to act but may not necessarily translate into higher interest rates. The major rating agencies have stated that the U.S. sovereign rating may once again be downgraded if political infighting derails efforts to produce more substantial long-term deficit reduction. However, history tells us bond markets have produced only a limited reaction to prior sovereign downgrades on average [Figure 3]. The average yield change has been negligible following downgrades and other factors, such as economic growth or central bank actions, have been focal drivers of interest rates for highly rated countries.