Fitch cuts US credit rating a notch from AAA; Treasuries, dollar see muted impact
Sign up now: Get ST's newsletters delivered to your inbox
The US was stripped of its top-tier sovereign credit rating by Fitch Ratings, echoing a move made more than a decade ago by S&P.
PHOTO: EPA-EFE
Follow topic:
NEW YORK - Rating agency Fitch on Tuesday cut the United States government’s top credit rating, a move that drew an angry response from the White House and surprised investors, coming despite the resolution two months ago of the debt ceiling crisis.
Early moves in US financial markets on Wednesday indicated some aversion to riskier assets as investors assessed the impact of the surprise downgrade.
Stock index futures fell, with Nasdaq futures down 0.7 per cent, while Treasury yields slid by three basis points. The dollar climbed 0.2 per cent, after slipping broadly in the wake of the downgrade.
Fitch downgraded the US to AA+ from AAA, citing fiscal deterioration over the next three years and repeated down-to-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.
The move follows a decision by S&P Global Ratings to strip the US of its triple-A rating in 2011, and leaves Moody’s Investors Service as the only one of the main rating agencies to keep the nation at its highest level.
Fitch’s move came two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement following months of political brinkmanship
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.
Investors say Fitch’s US downgrade to AA+ from AAA should not harm the top-notch status of US assets over the longer term, citing a lack of alternatives and the American economy’s solid growth.
They are also taking cues from what transpired in the wake of S&P’s similar downgrade in 2011 following an earlier debt ceiling crisis. While that triggered a sell-off in risk assets around the world, it boosted Treasuries as investors sought out havens.
Fitch’s downgrade may “ironically support Treasuries buying on concerns of follow-on downgrades to US corporate credit”, said Mr Chang Wei Liang, strategist at DBS Bank in Singapore.
“High inflation and growth remain the key triggers for Treasury selling, with credit ratings shifts largely mitigated by the substantial stock of US private wealth, and a correspondingly large safe haven demand for US Treasuries.”
UBS Global Wealth chief investment officer Mark Haefele also said: “Many major Treasury holders, such as funds and index trackers, will likely have already prepared for the move to avoid having to force-sell their existing holdings.”
Yields on 10-year Treasuries fell 24 basis points on Aug 8 in 2011, one trading day after S&P lowered the US’ credit rating.
“The Treasury market was highly volatile in the wake of S&P’s downgrade in 2011, but we would argue the underpinnings of the US economy were very different then, and we do not expect similar volatility in coming weeks,” wrote JPMorgan strategists including Mr Jay Barry in a note after the Fitch move.
US Treasury Secretary Janet Yellen on Tuesday said she disagreed with Fitch’s downgrade, in a statement that called it “arbitrary and based on outdated data”.
The White House had a similar view, saying it “strongly disagrees with this decision”.
“It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” said White House press secretary Karine Jean-Pierre.
Democrats in Congress seized on the downgrade to blame Republicans for holding up the US debt ceiling increase earlier in 2023.
“This is the result of Republicans’ manufactured default crisis. They’ve repeatedly put the full faith and credit of our nation on the line, and now, they are responsible for the second downgrade in our credit rating,” Democrats on the Ways and Means Committee said in a statement.
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets. Generally, the lower a borrower’s rating, the higher its financing costs.
Fitch had first flagged the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved, saying it intended to finalise the review in the third quarter of 2023.
A Moody’s Analytics report from May said a downgrade of Treasury debt would set off a cascade of credit implications and downgrades on the debt of many other institutions.
Other analysts had pointed to the risk that another downgrade by a major rating agency could affect investment portfolios that hold top-rated securities.
Raymond James analyst Ed Mills, however, said on Tuesday that he did not anticipate markets to react significantly to the news.
“My understanding has been that after the S&P downgrade, a lot of these contracts were reworked to say ‘triple-A or government-guaranteed’, and so the government guarantee is more important than the Fitch rating,” he said.
Others echoed that view.
“Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the US economy and markets,” Dr Mohamed El-Erian, president of Queens’ College Cambridge and part-time chief economic adviser at Allianz, said in a LinkedIn post. REUTERS, BLOOMBERG
