It's a little more complicated than that. Treasury bonds are actively traded on secondary markets. The 'price goes down, yield goes up' generally refers to secondary markets. The concern for the U.S. govt isn't the secondary market. It is the primary market where they auction off bonds to raise money to fund operations. In the primary market, the U.S. treasury issues a certain number of bonds in order to raise a specified amount of money. Investors bid on the bonds, and the best bid (i.e. lowest interest rate) wins. With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.

> The 'price goes down, yield goes up' generally refers to secondary markets.

No. It also refers to the bidding process when the US Govt goes to initiate the sale of bonds.

Regarding the rest: Yes, that is why I included "more or less" in my original post. The bidding for new bonds and the pricing of old bonds is quite close in most circumstances. (If they are not close, then there is usually trouble.)

> With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.

Regardless of the details above, we both get to the same place.

US government doesnt sell bonds to fund operations, it is never revenue constrained (because the US dollar is a non-commodity backed, floating exchange rate, fiat currency). It sells bonds to remove dollars from the system.

> US government doesnt sell bonds to fund operations

Yes it does.

> It sells bonds to remove dollars from the system.

No. The Fed is in charge of the money supply, and when they sell bonds, dollars are removed from the system.

The US Govt selling bonds actually increases various measures of the money supply.

I was under the impression that there were funds that were legally required to not anything lower than a certain value, but those values were much lower than AAA (AA or AA-).

Which funds cannot hold anything lower than AAA, and are they really big enough to dump enough US bonds to make a difference?

Some funds strictly cannot hold anything lower than AAA, but most have "investment grade" requirement which is BBB (Baa in moody's ratings)

That type of downgrade is very unlikely

The only ones I can find that are strictly AAA are either all-corporate to begin with, or explicitly say that they invest in "AAA-rated U.S. Treasury and agency securities" or similar language. Which is awkward if there is no such thing, but it's not clear it'd require them to sell off, since there's nothing eligible to move to.

Checked on BB. It looks like $80B of invested assets across bond funds with any reported information would be affected (which is paltry, considering the full run of US treasuries far exceeds $10T)