Jesse tells us that S&P has downgraded long-term U.S. sovereign debt while leaving the current rating for shorter term treasuries (2 years or less) intact. Full report here.
Jesse thinks that this is all a set up for QE3, but I think he's wrong. There's no need for QE3 with this downgrade, and QE3 wouldn't work anyway.
I predict that the long term effect of the downgrade will be that people will pile into 2 year treasuries, driving yields down, just as they did during QE2. At the same time, the yields of 10-year and 30-year bonds will rise, just as they did during QE2. This time, however, those yields will rise a bit (if not much) higher because they are no longer tied solely to the prospects of inflation (which are truly non-existent) but to the risk of default (which is also non-existent). This downgrade is all about creating yield premiums that are not warranted in view of the state of the real economy, making long-term treasuries an attractive investment.
I wouldn't be surprised to see equities continue to sell-off because all the yield you need will be found in long-term treasuries that are priced at a premium when compared to inflation expectations (or should I say deflation expectations).
Screwflation is in full effect.
