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The threats to bondholders

What was it that Donald Rumsfeld famously said? "There are known knowns, the things we know we know. There are known unknowns, things we know we don't know. And then there are the unknown unknowns, the ones we don't know we don't know."

Anyone working in the credit markets today probably understands what the US secretary of defence meant.

Investors have known for some time that a downgrade for General Motors was inevitable, and that Ford would probably go with it. So when Standard & Poor's cut the two auto makers to junk status, the only surprise was the timing.

This event was probably the biggest test to date of the resilience of the new global credit markets. Over the past few years, new credit products – such as credit derivatives, default swaps and synthetic CDOs – have gone from exotic to mainstream. How these markets reacted to the diminished status of the world's two largest corporate borrowers would show just how established they had become.

So far, the signs are pretty good. Of course a lot of people will have lost money, in particular funds that invested in standardised tranches of synthetic indices, but rumours of dozens of hedge funds going to the wall seem wide of the mark.

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