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Fitch Ratings’ downgrade of the US’s debt rating triggered contrasting reactions on Wednesday: outrage from the White House and calm in the Treasury bonds market assessed by the agency.
Fitch downgraded the US long-term rating from triple A to double A plus due to the country’s increasing debt burden and an erosion of governance, particularly on fiscal matters. This comes after the narrowly avoided default resulting from political disputes over the federal borrowing limit.
The Biden administration expressed anger, highlighting criticisms of the decision as “off-base”, “absurd”, and “widely & correctly ridiculed”. White House press secretary Karine Jean-Pierre stated, “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.”
The White House’s concern stems from the fear that the downgrade provides Republicans with ammunition to accuse Biden officials of mishandling America’s public finances. Democrats had hoped that the budget deal reached with Republican speaker Kevin McCarthy in June would put those criticisms to rest.
This downgrade by Fitch follows S&P’s similar downgrade of the US to double A plus in 2011 during President Barack Obama’s term. Fitch raised concerns about the steady deterioration in governance standards over the past two decades, even with the recent deal to suspend the debt limit until January 2025. Fitch also predicts a rise in the general government deficit to 6.3% of GDP in 2023.
The US debt burden is compounded by skyrocketing interest payments due to the Federal Reserve’s significant interest rate hikes, which are the highest in 22 years.
The Treasury department declared that the US would need to borrow more in the following months.
US Treasuries, which dominate the global bond market, are widely considered extremely safe. Central banks worldwide hold significant amounts of Treasuries, and these bonds underpin valuations in various asset classes. Although the credit rating downgrade suggests an increased risk of US default, the exceptional role of Treasury bonds in global markets is unlikely to change.
“I think it is completely and totally irrelevant,” stated Eric Winograd, director of developed market economic research at AllianceBernstein. “I have been trying to come up with a reason why investors would care about this, and I have not been able to. The probability of the US defaulting is exactly the same today as it was yesterday.”
Fitch’s decision is also unlikely to compel investors to switch from Treasuries to other triple A rated debt. Goldman Sachs pointed out that most investment mandates and regulatory regimes specifically refer to Treasury securities, given their significance as an asset class.
Goldman also noted that S&P’s US downgrade in 2011 had minimal impact on markets. Peter Tchir, head of macro strategy at Academy Securities, stated, “No one buys Treasuries because of the rating. US Treasuries are often mandated directly or included with other government-backed debt in mandates. The downgrade by Fitch is a non-event for yields.”
The Fitch decision and the US’s plan to increase borrowing had a modest effect on Treasury markets. Yields on 10-year Treasury bonds rose by 0.05 percentage points to 4.07%, the highest in a month. The S&P 500 stock index dropped 1.2% at midday on Wednesday.
Fitch announced its decision on the same day former President Donald Trump faced charges relating to attempts to overturn the 2020 election. Richard Francis, a senior Fitch director, stated that the agency also factored in the Capitol attack on January 6, 2021.
Washington officials appeared to attach more significance to Fitch’s rating change than many investors. Treasury Secretary Janet Yellen criticized it as “arbitrary and based on outdated data”. Jason Smith, the Republican chair of the House ways and means committee, accused Biden of pushing America’s credit rating off the ledge. However, it is important to note that the US’s fiscal problems are a result of policies adopted by both parties.
Karine Jean-Pierre accused Republicans of extremism, stating, “from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations”.
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