S & P Cut The Us Two Housing Rating &Nbsp; China'S Ultra Trillion Debt Assets Alert

Following the downgrading of the US sovereign debt rating, the S & amp; P downgraded the US Fannie Mae and Freddie Mac from AAA to AA+ in the morning of August 8th.

Observers say China should ask the United States to provide a guarantee for future potential losses of US debt.

If the United States wants to get Chinese funds, it can ask the us to issue Renminbi bonds to Hongkong or Shanghai, and then convert it into dollars through the safe so as to give domestic investors more choices and also slow down China.

August 8th was the first trading day after S & P downgraded the us long term credit rating, but in the Asian trading session, the price of the US short and medium term treasury bonds rose, and the price of the 10 year treasury bonds also changed little. Only 30 year Treasury prices continued to fall.

However, after the opening of the US market in the evening of 8, the price of treasury bonds rose every time, and the yield of the 10 year treasury bonds fell by 7 basis points to 2.49%.

The US Treasury bonds, which should have been directly hit, seemed to be quite calm.

Xiang Songzuo, deputy director of the International Monetary Research Institute of the people's Congress, believes that the S & P's downgrading of the US has little impact on the yield of US Treasury bonds. "Global investors, especially sovereign wealth funds, have more confidence in US Treasury bonds than from the US dollar as the global reserve currency.

"It is fair to say that the decline in US sovereign credit rating will lead to an increase in US Treasury yields, but this is not the case now.

It is mainly that China, such as China, which has large numbers of US debt, is unlikely to sell off because of a downgrade. At least in the short term, China's holdings of US debt will not change much. "

Bank of China [2.91 -0.68% shares] Zong Liang, deputy director of the Institute of international finance.

As of May, China held 11598 billion dollars in US debt, the largest holding country, and second of Japan held 912 billion 400 million dollars.

Although most agencies expect no dramatic changes in the US debt market in the short term, according to the US securities industry and Financial Market Association (SIFMA), downgrading the rating may raise the US bond yields by 0.7 percentage points in the long run, which will increase the public debt financing cost of the US $100 billion.

In August 8th, the head of the State Administration of foreign exchange told our reporter that there has not been any new statement about the US debt rating downgrade.

US institutional debt rating or downgrade

S & P warned in April that the US rating might be downgraded, which may partly explain the relative calm of the US debt market.

However, S & P's rating downgrades still have a greater impact on long-term bonds. The yield of us 30 year treasury bonds rose 23 BP in the two trading days as of the 8 Asian trading session as of July 2009, the largest increase in the yield of treasury bonds since then.

But after entering the European trading session, the yield of the 30 - year treasury bond declined to around 3.79%, and the US market continued to decline after opening.

Although there is no public information on the structure of China's US debt, the data released by the US Treasury show that China's growth in treasury bonds has been shortened for two consecutive months.

In May, it increased its holdings of US $8 billion 196 million long debt and increased its total holdings of US $7 billion 300 million in the same month. On that basis, we calculated a reduction of US $896 million in short debt in that month. In April, China also increased 9 billion 413 million US dollars in total debt, while the total amount of US dollar debt was increased by US $7 billion 600 million in that month.

Mitul Kotecha, a foreign exchange strategist at the Eastern Bank of Canada, believes that although the rating is down, the US bond yields will not be significantly affected, or may even fall further, as worries about economic growth and risk aversion are rising.

In addition to $1 trillion and 160 billion in US debt, it is estimated that China has more than $300 billion in Fannie and Freddie bonds.

Now, S & P downgraded the US Freddie Mac and Fannie Mae from AAA to AA+.

In this regard, RBS's US strategy research team also believes that the "two housing" issue of corporate bonds and mortgage backed bonds (MBS) ratings should also be downgraded, because the rating of institutional MBS implies the US government guarantee, but has a direct impact on the bond market. It is not expected that there will be a massive sell-off of US Treasury bonds, GSE bonds and other fixed income products.

"In fact, for central banks, panic selling US bonds and causing market turbulence is not in their long-term interest.

Our observation of capital flows over the past two weeks suggests that these institutions may see the rise in Treasury yields as an opportunity to buy.

For money market funds, the AA+ rating is also sufficient to allow them to continue to hold us treasury bonds.

Downgrading does not affect the risk weights of treasury bonds held by banks, so it has little impact on them.

RBS the US strategy research team said.

The "loss guarantee agreement" conjecture

Nevertheless, the alarm over China's trillion dollar US debt position has not yet been lifted.

S & P has given the us a "negative" long-term credit rating outlook, which means it is possible to further lower the US rating in the next 12 to 18 months.

"The central banks holding the US debt are really worried. On the one hand, they are worried about the downgrading of the stock market. On the other hand, they are worried that the US inflation will rise in the future, which will lead to a decline in the purchasing power of the US dollar.

The problem is that these central banks are not likely to sell US bonds on a large scale to buy anything else, because European debt is more serious than US debt.

Xiang Songzuo said.

As the yields on Italy and Spain surged, the European debt crisis began to rise again.

ECB announced last week that it would restart its bond buying program, buying Irish and Portuguese bonds, and saying it might buy bonds from west and West.

But analysts at CICC pointed out that ECB's bond buying operation in the two tier market failed to stop the soaring yields of Greek bonds. It is hard to believe that this time ECB can prevent the debt crisis from spreading to Italy and Spain.

Xiang Songzuo pointed out that the diversification of foreign exchange reserves is very difficult to operate. First of all, it is difficult to keep pace with the growth of foreign exchange reserves because of the pace of diversification. "Now it is more than 3 billion US dollars, and the total market capitalization of the global monetization is 1.3-1.4 trillion dollars. Even if it is bought, there will be two trillion of the total foreign exchange reserves.

Foreign exchange reserves continue to grow, most of them can only buy US debt.

"If there is no major adjustment in the economic structure, as a specific investment decision for foreign exchange reserves, we can only choose between the weaker US dollar debt, the worse euro debt, or the worse yen debt."

Ba Shu song, deputy director of the Financial Research Institute of the development research center of the State Council, also said bluntly.

Regarding the plight of foreign exchange reserve investment, Xiang song Zuo believes that instead of condemning the United States, China should do more to hold the US debt as bargaining chip. First, it requires the United States to provide guarantees for future potential losses of US bonds, including the loss of the value of the bonds themselves and exchange rate losses. "This is a precedent in history. In the 60s of last century, some European countries used to hold a large amount of US dollar reserves, and also worried about the depreciation of the US dollar, and signed the exchange rate loss guarantee agreement with the United States".

He also suggested that if the United States wants to obtain Chinese funds, it can ask the United States to issue Renminbi bonds to Hongkong or Shanghai, and then convert it into dollars through the safe. "In this way, the RMB bond market can be developed, domestic residents have more investment choices, and on the other hand, the pressure on foreign reserves can be reduced.

In the history, the United States also issued Mark bonds in Europe.