© Reuters.
Investing.com – Many global economic voices tried to sideline the impact of Fitch’s downgrade of the US credit rating this week, but some experts took a different view.
Mike Cosdale, portfolio manager at Pimco, explains the consequences of this downgrade, and says it is symbolically significant and has practical implications for markets.
Cosdale also warns that “for the second time in 12 years, one of the three major credit rating agencies has stripped the US government, the world’s largest issuer of sovereign debt, of its first-tier credit rating. This is symbolically significant and also has practical implications for markets, and we don’t expect this to lead to a major sell-off in US Treasury bonds or a short-term shift in investor behaviour.”
“Importantly, we do not believe that the downgrade reflects significant new information about the strength of the US government. It is still considered the benchmark risk-free asset class and serves as a benchmark in financial markets around the world. We also do not expect the downgrade to affect the volume or The pace of the US Federal Reserve’s rate-raising cycle in its battle against inflation.
Economic and political influences
Cosdell explains that despite widespread expectations of a weaker US economy this year, the timing of the downgrade was remarkable, with recent data raising questions about the possibility of a recession in the US. Recent data, culminating in a better-than-expected second-quarter GDP report, suggests that the US economy is proving more resilient than expected with interest rates rising under the Fed’s tightening policy and inflationary pressures easing.
The expert believes that the possibility of a recession in the near term has become less, as he said: “We still believe that the US economy will slow in the second half of 2023 due to stagnant bank lending, the late effects of monetary policy and fiscal headwinds. However, given the initial growth momentum The economy now looks stronger, and the headwinds for the banking sector may be milder.
market influences
The Fitch downgrade is another reminder that risks to deficit spending and debt sustainability, which tend to linger, could emerge and raise concerns. Cosdale says this creates the potential for surprises and volatility in the market, particularly given the reduced capacity for fiscal and monetary support.
“In the long term, this could lead to a weaker dollar, higher bond yields, and yield curves becoming steeper. The UK debt-driven investment (LDI) crisis last year was a similar reminder that concerns about financial stability can arise quickly, and that the UK United can serve as an early warning bell regarding long-term financial matters.”
The Pimco expert concludes, “For now, volatility may benefit those investors who remain flexible and can seize opportunities when market valuations rise. While the opinions of rating agencies and ratings are important, at Pimco we continually conduct our credit research. We build portfolios in a way that takes into account that US economic data has improved, but is focused on holding resilient assets in the face of continued risks and macroeconomic uncertainty.”
2023-08-05 12:56:00
#Urgent #Significant #Consequences #Fitch #Downgrades #Credit #Rating #Investing.com
