First: huge kudos to Chris Ahrens and Mike Schumacher for producing something both plausible AND readable. Many of these communications are neither.
After spending some time explaining that August 2 is not a default date and it's a projection anyway, Ahrens et al note that this is a date when there would in the ordinary course of business be an announcement about another auction -- an auction which might not be able to happen until after the debt ceiling is raised (or more time has gone by). There's a little speculation about the impact of an announcement (minimal) and then on to the Ratings Agency Downgrade Threat. In that section, they break down who holds US debt and how they might react to a downgrade. Many who hold debt have rules about the quality of debt they can hold, however, the downgrade(s) that might occur would not be severe enough to trigger these rules for money market funds. The money quote: "Strike us dumb if the rating agencies drop the US below the second tier in the next month." Heh. This was the point where I started paying attention.
On the subject of Central banks: "We have met with most of the major central banks in the past 3-4 months, and cannot recall any of them indicating it will sell Treasuries if the US is downgraded." These are people who fully understand the "compared to what?" problem. Hedge funds, asset managers and index funds and insurers and commercial banks seem underwhelmed by the prospect of a downgrade (many said they'd buy if yields rose).
There _might_ however be an impact on collateral agreements if US debt was no longer considered "risk free".
So the downgrade is being treated as a non-issue, already priced in. Then they move on to contemplating an actual default. "We agree that it is a very hard concept to get one’s mind around, but feel obligated to make an attempt." *snicker* Maybe I shouldn't be laughing, but that is hilarious. Anybody got popcorn?
"if Treasuries stop accruing interest, will electronic platforms shut down and markets move to manual pricing and voice-over trading?"
You thought the foreclosure crisis caused a complete seize-up (har de har har) of bureaucracy? You ain't seen nothin' yet. This has nothing to do with panic, and everything to do with omg we have to do it all manually.
LOTS of stuff has rules that say, "Cannot hold defaulted securities". There would be a lot of forced liquidiation.
The sum up is tremendously ambiguous: so, what _would_ happen to the yield curve in the event of a default? Flight implies a massive uptick. But a recession would be associated with a drop.
And that's the end of the note (possibly along with the contents of your brain, if you understood all that).
Again, Ahrens and Schumacher did a great, punchy job with a tricky problem. I am _not_ mocking them. And the situation is pretty dire. But anyone who knows me knows how I react to Really Dire: DOOOOOMMM!!! :-)