The likely downgrading of America’s sterling AAA debt rating by Standard & Poor's, which some analysts suggest might happen later this month, could cause a “severe” impact on fixed income markets “for some time,” according to Sanford Bernstein analyst Brad Hintz.

One result: a hit to the revenue of big trading firms like Goldman Sachs and Morgan Stanley as a downgrade leads to “a period of one-way markets” on trading desks.

Hintz says that the downgrade -- if and when it comes and even if  only one of three rating agencies issue it -- is likely to result in several months of credit market “disruption,” which could spread beyond Treasuries to the corporate bond and tax exempt bond markets.

Further, the report warns that a downgrade, combined with continued downward pressure on the dollar, will lead to a steepening of the Treasury yield curve “as investors move to shorter maturities.”

Bernstein told On Wall Street, “We looked back at the five other big credit events that have occurred since 1980, like Drexel’s failure or Russia’s default, and each time you got a disruption in the marketplace that lasted several months, until things re-stabilized.”  He said the same thing is likely to happen this time with a downgrade of the U.S. debt rating to AA.

“Will you have a massive run on Treasuries if there’s a downgrade?” he asked. “No. But this is still going to be a very unfortunate event. It will hurt revenues at the big trading firms. It will hurt the repo market and corporations will find it harder to issue bonds until the Street readjusts.”

The reason that things won’t be worse, he said, is that holders of U.S. Treasuries really have nowhere else to turn.  “It’s like the elephant in a swimming pool,” he said. "There are only two pools -- the U.S. and Europe -- and so when the elephant gets out of one pool and goes into the other, the water level goes down in one pool and rises in the other.”

Also easing the impact of any downgrade, Hintz said, is the fact that it is getting so much advance attention.

"We note that market participants have been preparing their desks and positioning their trading inventory in anticipation of this potential," he said. "We therefore would not expect the downgrade to have as significant an impact as the 1998 Russian default, which reduced FICC revenues by 35.8% from peak to trough.”