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Lots of people are talking about S&P decision to cut rating on US Debt Plan. Ok…cool down and lets us hear some opinions from  >>>>

Ok guys, this is from Adam Khoo opinion regarding what will happen when US rating being downgraded or being cut down to AA+.

Stocks May Sell Off But Treasuries Could Rally

A downgrade of the U.S.’s debt rating could cause a sell-off on the riskiest side of the bond and stock markets. Investors who discover that their portfolios of triple-A rated U.S. Treasuries are now considered riskier might decide to rebalance their portfolios to reduce risk. Investors selling off riskier assets (i.e. Stocks and low grade bonds) would need to put the proceeds somewhere, and US traesuries are likely to benefit. The need to provide more collateral to counter-parties would also increase the demand for Treasuries. This may in fact create the very very odd effect of U.S. bonds rallying in the face of a downgrade.

When Japan Was Downgraded in 2002, their Bonds Actually Rose!

When S&P downgraded Japan’s credit rating in 2002. Many investors thought Those that shorted Jap bonds got killed when in fact, Jap bonds rose! Same thing could happen here for the US case.

Financials Stocks May Get Hit

The stocks that could get hit the most would be financial companies like banks.

Banks would probably get downgraded following the downgrade of the U.S. credit rating. These banks currently enjoy higher ratings than they would if not for the perception that they will be bailed out by the government if they get in trouble. If the U.S. debt is riskier, so are the banks backed by the U.S. If it should happen, this could pose problems for some banks, because it would likely raise their borrowing costs. The most thinly capitalized banks might become distressed. So be careful if you are holding too many bank shares!

A downgrade of U.S. Debt may force banks to raise hundreds of billions in new capital. Banks aren’t required to hold any capital at all against U.S. Treasurys, because the assets are considered risk-free. A downgrade would mean these assets are not risk-free, which would mean that banks might have to set aside capital for these assets. Banks lack adequate available capital to reserve against their holdings of Treasurys, so they’d have to come to the market to raise new capital.

However, a saving grace could be that the Federal Reserve would likely agree to forebear from requiring banks to hold additional capital against Treasurys—which would eliminate the need for capital increases. So, banks may be saved after. Who knows what will happen? Will wait and see,

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