Fitch (Fitch) on Tuesday (1st) became the second credit rating agency to remove the AAA credit rating of the US government. This move immediately drew criticism from the White House and the Treasury Department. The $25 trillion U.S. Treasuries market could see a surge, depending on how financial markets react.
“The timing is a bit of a surprise,” said Chip Hughey, executive director of fixed income at Truist Advisory Service. “But if we compare to August 2011 (S&P removed the US’ triple-A credit rating), the market’s immediate concern was not the ability of the US to meet its debt obligations. , but because of concerns about economic growth, there is a huge demand for U.S. Treasuries.”
In August 2011, S&P Global downgraded the US credit rating from AAA to AA+, just days after Washington reached a debt-ceiling deal.
When the government shutdown crisis resurfaced this year, Fitch warned in May that it might pull the trigger, citing a stalemate in the debt-limit dispute over both parties’ “brinkmanship” that threatened extreme measures.
In June, although the U.S. ruling and opposition parties agreed to suspend the debt ceiling until January 2025, Fitch did not remove the U.S. from the rating downgrade watch list, and announced a resolution to remove it a month later. Fitch explained that the downgrade stemmed from “the erosion of governance” amidst ill-health such as “expectations of fiscal deterioration,” a “high and growing” government debt burden, and recurrent political confrontation.
“Recurring political deadlock over the debt ceiling, with a last-minute resolution, has dampened confidence in U.S. fiscal management,” Fitch said on Tuesday.
Market Reaction
According to FactSet data, when S&P downgraded in 2011,10-Year Treasury Bond YieldFrom about 3% in August, it fell to 1.8% by the end of September, and risky assets were sold off.
“We can’t tell. The market reaction this time around will be the same as in 2011,” said Truist’s Hughey. “On the other hand, Fitch’s reasons for the downgrade, another downgrade, could change perceptions of U.S. credit.” Market worries may prompt investors to rush into traditional safe-haven assets.
Short-dated U.S. Treasury yields rose above 5 percent in April and have remained high since then, partly because of the Federal Reserve’s rapid rate hikes to curb inflation. The Fed raised interest rates again in July, raising the benchmark interest rate by 1 yard (25 basis points) to 5.25-5.50%, a 22-year high.
Investors have been snapping up huge amounts of government debt, undeterred by higher borrowing costs, since the government and opposition reached a debt-limit deal that allowed for replenishment of U.S. coffers. A “tsunami” of bond issuance can be expected after the U.S. Treasury estimates that borrowing will hit $1 trillion in the third quarter.
As a benchmark for various loans such as housing loans and commercial loans 10-Year U.S. Treasury Yield, rose to 4.048% on Tuesday, the second-highest level so far in 2023. The yield slipped about 3.2 basis points to 4.015% at one point after Fitch announced the cut before the Asian open on Wednesday.
Currently, Moody’s Investors Service (Moody’s) still gives the US AAA credit rating with a stable outlook.
2023-08-02 03:40:02
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