Standard & Poor’s stunning move to downgrade U.S. long-term credit raises some troubling questions for bond-holders who are required to hold only AAA-rated securities.

But the biggest concerns might be the foreign governments, who have amassed huge amounts of U.S. Treasuries in recent years. How will they react to the downgrade?

While some foreign officials have expressed their confidence in the stability of U.S. government finances and the value of their U.S. Treasuries holdings, the single-largest foreign owner, China, has already excoriated Washington for its profligate behavior.

In the event Monday witnesses a massive sell-off of Treasuries, bond yields would surge.

So, who are the biggest owners of U.S. government debt?

According to the Treasury, as of May 2011, the top ten holders were Mainland China ($1.16-trillion); Japan ($912-billion); the United Kingdom ($347-billion); a consortium of oil exporters, including Saudi Arabia ($230-billion); Brazil ($211-billion); Taiwan ($153-billion); Caribbean banking centers, which include the Bahamas ($148-billion); Hong Kong ($122-billion); Russia ($115-billion) and Switzerland ($108-billion).

Total U.S. Treasury holdings by foreigners amounted to about $4.5-trillion.

Asian countries will likely be compelled to keep their Treasury holdings, since they must buy dollars in order to hold their own currencies in check (so as not to hurt their export business).

"They won't be happy about it, but Asian central banks will just have to hold on and stick it out," said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, Australia, according to the media reports.
"There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren't holding on to distressed assets."

Ironically, Treasuries have indeed been performing well lately.

Since July 1, the yield on the 10-Year Treasury has fallen from 3.2 percent to 2.56 percent on Friday (a 20 percent decline). As yields fall, the value of the bond rises.