When "Risk-Free" Isn't Risk Free: The Impact of a US Treasury Downgrade

Many investors are on edge about the market’s reaction to a possible downgrade in US Treasury bond ratings if the near-term debt ceiling isn’t raised. Our view is that a deal will eventually be struck to keep the US from defaulting on its obligations.
But while the US political system may resolve the near-term fiscal crisis, it seems unable to address the long-term structural issues behind it. Rating agencies have put the US on notice that those issues could lead to a Treasury downgrade, regardless of whether the debt ceiling is raised. What would happen if US Treasury ratings were downgraded?