S&P Cuts AAA Ratings on Thousands of Municipal Bonds After US Downgrade

I don't much reaction from the markets to that news, but it is still noteworthy:
2011-08-09 (Bloomberg) Standard & Poor’s lowered the AAA ratings of thousands of municipal bonds tied to the federal government, including housing securities and debt backed by leases, following its Aug. 5 downgrade of the U.S.
S&P also cut ratings on securities backed by Fannie Mae and Freddie Mac, prerefunded issues and munis repaid by using federal assets, also known as defeased or escrow bonds. No state general-obligation ratings were affected and the company said some may remain unchanged.

“It’s expected, but nobody is happy about it,” Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., said in a telephone interview. “No one that I know thinks it was justified to cut the U.S. bonds to AA+. Once that happened, you knew that any prerefunded bonds or escrowed bonds would be downgraded too. It’s a domino effect.”

Byrnes said funds required to invest in AAA bonds would be most affected by the downgrades and may be forced to liquidate some holdings. “They will have a hard time replacing that yield,” he said.

[...] Matt Fabian, a managing director of Concord, Massachusetts- based Municipal Market Advisors, a financial research company, said in a telephone interview that he expected “hundreds and hundreds of municipal downgrades,” which may hurt investor confidence.

Treasuries may be able to shake off a real impact from the downgrade,” he said. “Munis, I’m less sure about.
Any state and local government downgrades from S&P may be similar to potential rating cuts Moody’s mapped out last month, DeGroot said in his report. Moody’s on July 13 said a possible U.S. downgrade would affect 7,000 municipal credits totaling $130 billion that are directly linked to U.S. credit.

Moody’s also said it would review indirectly linked debt and last month said it may downgrade five of the 15 states it ranks Aaa because of their vulnerability to cuts in federal spending. The company wound up reaffirming those top ratings last week, assigning a negative outlook.

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