Fitch Ratings' decision to cut the U.S. government's top AAA rating ahead of Wednesday's quarterly refunding statement from the Treasury has left investors,...
Fitch Ratings’ decision to cut the U.S. government’s top AAA rating ahead of Wednesday’s quarterly refunding statement from the Treasury has left investors, analysts and officials weighing the likely impact on the agency’s $1 trillion third-quarter borrowing plans. For now, that impact appears to be rather muted. Describing U.S. government debt as still the safest and most liquid asset in the world, Josh Frost, U.S.
In 2011, when Standard & Poor’s downgraded the U.S.’s credit rating to AA+ from AAA, investors counter-intuitively flocked to Treasurys for safety. That experience, which left many in financial markets unscathed, may be helping to mitigate the fallout of Tuesday’s decision by Fitch.
See also: $25 trillion Treasury market is in the spotlight as U.S. loses its AAA rating for a second time Those concerns have failed to materialize so far, however. Now, “attention has shifted to more generalized profitability concerns that may continue to worsen with funding rates higher, shift in financial regulation, and an inverted yield curve over time compressing net-interest-margins,” they wrote.
While Fitch’s decision might be expected to push yields higher on U.S. government debt as investors demand a greater risk premium, Marcelli and others pointed to the 2011 experience and said that “based on historical experience and current economic conditions, we expect yields to fall, and we view US government bonds as most preferred.”
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