Standard & Poor's Rating Services downgraded the outlook for the long-term rating on US sovereign debt from stable to negative but left unchanged the actual credit rating for both long and short term debt. The downgrading was on the basis of the very large budget deficits, as illustrated in the chart, and rising government indebtedness together with an unclear path towards addressing these. As the credit rating agency stated, '... we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the US within two years.' Not what President Obama nor Congress nor the American people want to hear!

While it is hard to imagine a situation in which the US government would be unable to borrow, service and redeem its debt the fact is that the warning comes as an unwelcome shock. In a sense the gilt market may even be a beneficiary in view of the steps taken by the UK government to impose not just fiscal discipline by cutting spending and raising taxes but also a framework involving an Office for Budget Responsibility for ensuring that the discipline works to reduce budget deficits over the medium term.

But leaving this aside, the warning from Standard & Poor's is precisely ... well, a warning. Moreover, it may be even positive in providing a galvanizing moment for Congress to get down to business speedily and iron out a gimmicks free and credible way forward in dealing with budget deficit reduction and America's growing indebtedness.

David Fuller's view We maintain that US interest rates will move higher over the medium to longer term.

While this is a good overall summary by Mike Lenhoff, I think there will be fewer earnings surprises on the upside in 2Q and 3Q 2011.