Securities lending markets face uncertainty over effect of US downgrade, European bond markets stabilising
08 August 2011 London
Image: Shutterstock
Market fears were confirmed over the weekend when Standard & Poor's (S&P) downgraded the US to AA+ from AAA.
The downgrade was slammed by White House officials, who pointed out a $2 trillion mistake in S&P's calculations, which was acknowledged by the rating agency. But S&P reiterated that the downgrade was a result of squabbling between Democrats and Republicans in aligning fiscal policy.
Immediately after the downgrade, the Federal Reserve issued guidance to banking organisations, stating that "the risk weights for Treasury securities and other securities issued or guaranteed by the US government…will not change". This means that US banks will not have to put aside more capital against their holdings of US government-backed debt.
Additionally, the Depository Trust & Clearing Corporation (DTTC) stated that it will not make any changes in valuations of securities required for collateral. However, there was an indication that DTTC is set for a downgrade today, according to Reuters.
Moody's confirmed the US' AAA rating earlier last week, meaning the US has a split rating and markets seemingly have a choice. Still, the credit rating agency also assigned a negative outlook, warning of a downgrade if the US cannot get its financial house in order.
But it's the markets not under such direct control of regulators, such as securities lending, facing the most uncertainty as attention turns to the repo, derivatives and securitisation markets, which commonly use US Treasuries as collateral.
If risk-weight is increased, more Treasuries will be required as collateral, in effect reducing the amount that can borrowed. Treasuries currently enjoy a low haircut, averaged at two per cent, but if perceived risk increases, that could rise to three per cent, according to various media reports.
In Europe, the ECB is intervening in Italian and Spanish bond markets after leaders held emergency talks over the weekend. Yields tumbled in response and borrowing costs were seen dropping this morning, according to FT reports.
The downgrade was slammed by White House officials, who pointed out a $2 trillion mistake in S&P's calculations, which was acknowledged by the rating agency. But S&P reiterated that the downgrade was a result of squabbling between Democrats and Republicans in aligning fiscal policy.
Immediately after the downgrade, the Federal Reserve issued guidance to banking organisations, stating that "the risk weights for Treasury securities and other securities issued or guaranteed by the US government…will not change". This means that US banks will not have to put aside more capital against their holdings of US government-backed debt.
Additionally, the Depository Trust & Clearing Corporation (DTTC) stated that it will not make any changes in valuations of securities required for collateral. However, there was an indication that DTTC is set for a downgrade today, according to Reuters.
Moody's confirmed the US' AAA rating earlier last week, meaning the US has a split rating and markets seemingly have a choice. Still, the credit rating agency also assigned a negative outlook, warning of a downgrade if the US cannot get its financial house in order.
But it's the markets not under such direct control of regulators, such as securities lending, facing the most uncertainty as attention turns to the repo, derivatives and securitisation markets, which commonly use US Treasuries as collateral.
If risk-weight is increased, more Treasuries will be required as collateral, in effect reducing the amount that can borrowed. Treasuries currently enjoy a low haircut, averaged at two per cent, but if perceived risk increases, that could rise to three per cent, according to various media reports.
In Europe, the ECB is intervening in Italian and Spanish bond markets after leaders held emergency talks over the weekend. Yields tumbled in response and borrowing costs were seen dropping this morning, according to FT reports.
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