On Tuesday, August 1, the credit ratings agency, Fitch, downgraded US government debt from its pristine AAA rating to one notch lower at AA+. Fitch declared, “The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.” 1
While this news may raise some eyebrows, it is essential to keep it in perspective and understand its implications.
The Fitch downgrade comes as a response to the US government’s fiscal challenges and the repeat debt limit standoffs, like we saw earlier this year. While this is not the first time a major credit ratings agency has downgraded the US debt (Standard & Poor’s downgraded the US debt from AAA to AA+ in August 2011), it is crucial to recognize that the current market reaction has been relatively subdued. Investors seem to be looking beyond the downgrade, as the US is still perceived globally as one of the safest borrowers.
Despite the downgrade, US treasuries remain a “safe haven” investment. The confidence in the US government’s ability to pay its debts and strengths of its economy are the primary reasons behind this sentiment. As such, it is highly unlikely that the Fitch downgrade would change this role or significantly impact the government’s borrowing costs. Most economists believe that what the Fed does at their next meeting in September will have a bigger impact than the news from Fitch.
While the Fitch downgrade itself may not prompt immediate policy changes, it does highlight the importance of addressing fiscal challenges and debt ceiling issues in the long term. Moody's, another major ratings agency, still maintains the highest rating for the US government. However, if repeated standoffs over the debt limit continue, further action from a ratings agency could be a possibility.
At Foster Group, we emphasize the importance of a diversified investment strategy for our clients. By spreading investments across various asset classes and regions, we aim to mitigate risks. The Fitch downgrade serves as a reminder of the necessity of diversification, as no investment is entirely risk-free. Diversified portfolios can better weather economic uncertainties and fluctuations in specific markets.
We encourage clients to stay informed, but not to be swayed, by short-term developments or market fluctuations. Economic indicators, geopolitical events, and credit rating changes can create short-term volatility, but long-term investment strategies should remain steady and aligned with individual financial goals. If you have any questions or concerns, please do not hesitate to reach out to your advisor.
1 Fitch https://www.fitchratings.com/research/sovereigns/fitch-downgrades-united-states-long-term-ratings-to-aa-from-aaa-outlook-stable-01-08-2023