Stock exchange traded funds faded Wednesday after a morning rally but the real bombshell was dropped on markets after the closing bell when Moody’s said it is reviewing its Aaa rating on U.S. government bonds.

Moody’s said it placed the rating on review for possible downgrade on concerns a deal on the U.S. debt ceiling may not be reached in Washington.

“The review of the U.S. government’s bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default,” the ratings agency said.

“Moody’s considers the probability of a default on interest payments to be low but no longer to be de minimis,” it added.

U.S. stock ETFs closed well off their highs Wednesday as earlier gains fizzled after Federal Reserve Chairman Ben Bernanke said the central bank stands ready to change monetary policy in response to economic weakness.

Treasury ETFs erased early losses and closed higher Wednesday. [Treasury ETFs Volatile on ‘QE3’ Talk]


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