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Some fund managers said Wednesday's outlook downgrade was unlikely to raise the government's borrowing costs by much though it could hurt Australian companies whose ratings are dependent on the sovereign rating.
"A large proportion of credit funds are mandated to maintain funds in a specific ratings bucket," said Asmita Kulkarni, Director Investment Strategy at FIIG.
"With potential widespread downgrades we could see funds being forced to sell-down investment which would result in a widening of credit spreads."
Australian long-dated bonds sold off after S&P's outlook downgrade with 10-year yields jumping to 0.967% from 0.909% at Tuesday's close.
Economists said they do not expect a rating downgrade prior to the federal budget due on Oct. 6.
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It was only in September 2018 that S&P upgraded Australia's outlook to "stable" from "negative" as the budget came close to balance. The government had even projected a surplus for the current fiscal year and next.
While all those predictions are now under water, Australia's public debt is still in good shape, S&P noted.
"While fiscal stimulus measures will soften the blow presented by the COVID-19 outbreak and weigh heavily on public finances in the immediate future, they won't structurally weaken Australia's fiscal position," S&P said.
"This expected improvement is a key supporting factor of our 'AAA' rating."
