For reference, the downgrade of U.S debt by one of the ratings agencies, Standard & Poors, had no impact on interest rates, so a downgrade by itself will not result in higher yields being required to sell U.S. issued debt. Despite the S & P downgrade, U.S debt is still considered AAA because it still maintains that rating from other ratings agencies. But if they all downgrade the U.S. debt, the AAA rating will be lost. A failure by the Deficit Super Committee to come up with a plan to reduce the deficit could lead the other rating agencies to reconsider whether the U.S. debt really deserves a AAA rating.
Unfortunately, a continued stalemate by the Deficit Super Committee could have serious consequences for the cost of funding U.S debt if their inaction leads to: 1) the AAA credit rating of the U.S. being downgraded; and 2) a loss of confidence in the perceived value of U.S issued debt. Given that $11 billion dollar of TIPS are being offered today and $99 billion in notes are being auctioned on 11/21-11/23, even a slight increase in the yield required to sell the bonds will cost U.S. taxpayers dearly. Just a 0.1% increase in the average yield would increase the annual interest payments on this debt by $10 million.