It has become a mantra that any downgrade of the U.S. debt rating to less than triple-A would have the effect of increasing borrowing rates for the U.S. Treasury, Stephen Walsh, CIO of Western Asset Management, told CNBC Monday. But it’s the borrowers at the lower end of investment grade that may suffer.
"A lot of our guidelines for clients read, 'We need to maintain a double-A average credit quality in a broadly diversified portfolio.' Obviously, by having a lot of Treasurys and government agency securities you'll able to buy some junk bonds, some lower-quality debt," Walsh said.
If Treasurys were to be downgraded, the average quality of the portfolio would suddenly be at risk of falling below double-A minus, he explained. But "if you knew nothing else, you'd actually have to sell lower-quality assets to bring your average quality up."
The downgrade would have compliance and guideline implications for any portfolio manager, but it is not a certainty that it would result in a sell-off of US Treasurys, added Walsh.
"It would typically involve probably selling more risk assets on the lower end of the quality spectrum," he concluded.