A AAA monoline failure edges closer

According to Bloomberg:

Security Capital Assurance Ltd. may lose its AAA credit rating at Fitch Ratings, the first top-ranked bond insurer put on notice since the industry came under scrutiny last month because of rising defaults on subprime mortgages that back securities they guaranteed.

Short munis, long treasuries.

Update. The tail end of the field is starting to fall behind:

FGIC Corp. and XL Capital Assurance Inc., two bond insurers, may lose their Aaa credit ratings at Moody's Investors Service after a slump in the value of the debt they guarantee.

MBIA Inc., the largest bond insurer, and CIFG Guaranty had their outlooks lowered to ``negative'' by the New York-based ratings company today. The Aaa rankings of Ambac Financial Group Inc., Assured Guaranty Corp., and Financial Security Assurance Inc. were all affirmed, signaling no plans to change them, Moody's said. Radian Group Inc. was also affirmed.

Remember that the wrapped bond market is over $1T: this warning puts over 80,000 separate bond issues on negative watch according to Calculated Risk. If the ratings agencies hold their nerve and do actually downgrade a major monoline, the market impact will be enormous.