US Debt Downgraded

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5 min
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As the team's Capital Markets Analyst, Jacob conducts market and investment research and assists in the development of business strategy to serve our clients more effectively.
August 4, 2023

Fitch, one of the top US ratings agencies, downgraded US government debt from AAA to AA+. One slight little notch down in credit rating.

But that slight little notch down in the credit rating sent markets lower on Wednesday.


Now that notch down in the credit rating has zero implications today. That little notch down in the credit rating was only traded on speculation.

Speculation that in the future investors using Treasuries as lock boxes, these are mostly other governments and central banks, would start to diversify away and demand for US government debt and subsequently the dollar would weaken.

I believe those fears are largely over blown. No economy today has the potential to overhaul the US economy.

Doomers are and have been looking for every reason to say that the dollar will be “no more” and the US will see some major reversal. The simple fact is there would be much more obvious signs.

Fitch downgraded US debt on the premise that Congress would fail to raise debt limits in the future. Not because the US is at risk of actually defaulting on it’s debt.

Fitch is about 12 years behind Standard and Poor’s on doing this as well. In 2011 during the last debt ceiling crisis S&P downgraded US government debt to AA+. Moody’s is the last rating agency to hold US government debt as of the highest quality, Aaa.

The other large concern is that investment managers would be forced to sell Treasuries because their investment policies or mandates require them to hold securities with a certain credit rating.

But Goldman wrote a statement about that, “We do not believe there are any meaningful holders of Treasury securities who will be forced to sell due to a downgrade. S&P downgraded the sovereign rating in 2011 and while it had a meaningfully negative impact on sentiment, there was no apparent forced selling at that time. Because Treasury securities are such an important asset class, most investment mandates and regulatory regimes refer to them specifically, rather than AAA-rated government debt.”

But while on the topic of AAA-rated government debt. The US has fallen behind several other developed countries as far as their credit rating goes.

Source: Bloomberg via Disruptor

The United States government has also fallen behind some US corporations as far as credit rating goes.

Source: Valerie Noel

However despite the fact that Microsoft or Luxembourg has a higher credit rating that the US government, they still don’t have the liquidity and the sheer strength of the US economy and market.

That’s what people buy treasuries for and every now and again get freaked out about some political cage match over who’s bill is going to get signed.

No other country or corporation can print more money to finance it’s own debt as easily as the US government. Which granted isn’t a great strategy, but it certainly is a bad lever to be able to pull.

Who even buys Luxembourg, Denmark, or Australian debt. Some central banks, some portfolio managers managing a global bond fund.

Virtually every portfolio manager, central bank, and corporation on plant Earth holds US Treasuries, or at least the US dollar.

So as far as fears go, I think you can set them aside for now.

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