From everything I read, the U.S. debt downgrade is expected to drive up borrowing costs all across the board. But I have a theory that it will actually lower the borrowing costs of large, financially sound corporations. After the downgrade, the supply of AAA-rated debt has shrunk, so bond buyers will need to look for other alternatives, e.g. top-rated corporate bonds such as Exxon Mobil. This increased demand would allow Exxon Mobil to issue its bonds at lower rates, resulting in lowered borrowing costs.

Would it make sense for an individual investor to consider a greater allocation towards equities of companies with pristine credit ratings?

Are there any studies that support or refute this theory?

  • 1
    Your theory seems to be playing out in Mexico: bloomberg.com/news/2011-08-09/…
    – Muro
    Aug 9 '11 at 14:29
  • If there was increased demand for a bond, why would a company reduce the price? Increased demand tends to raise prices, not reduce them.
    – JohnFx
    Aug 9 '11 at 15:21
  • 4
    @JohnFx It's not the price, it's the interest rate that is reduced. More people want your bond, so you can get a way with offering them less interest.
    – Lagerbaer
    Aug 9 '11 at 18:53
  • I'm not sure this is technically possible, so I asked this question money.stackexchange.com/q/10163/1091
    – sharptooth
    Aug 10 '11 at 10:42

In a relative sense yes there is potential for this. For example Microsoft maintained it's AAA rating. (on the other hand, MS has so much cash, you wonder what it might need to issue bonds for.)

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