Will August 2023 be a repeat of August 2011?
Fitch Ratings on Tuesday became the second major credit firm to cut the U.S. government’s top AAA rates to AA+, a move that was swiftly condemned by the White House and the Treasury Department.
But if the past can be a guide, the big reaction in financial markets might actually be a rally in the roughly $25 trillion market for Treasury securities.
“The timing is a little surprising,” said Chip Hughey, managing director, fixed income, at Truist Advisory Service, in a phone call with MarketWatch on Tuesday evening.
“But if we look at 2011 as a comparison, the immediate response wasn’t about the ability of the U.S. to meet its debt obligations,” Hughey said, but rather toward potential economic growth concerns that “created demand for U.S. Treasurys, despite the downgrade.”
S&P Global Ratings downgraded the U.S. credit rating in 2011 to AA+ from AAA, in the days after a debt-ceiling deal was reached in Washington.
Fitch initially warned in May that it might pull the trigger too, in part due to “brinksmanship” as the latest debt-ceiling fight remained at an impasse. It warned of the possibility again in June, after the U.S. reached a deal on its borrowing limit, with the actual downgrade following roughly a month later.
See: U.S. AAA debt rating gets a downgrade by Fitch; White House says move ‘defies reality’
Around the 2011 downgrade, the 10-year Treasury yield
TMUBMUSD10Y,
fell from a roughly 3% rate heading into August to about 1.8% in late September, according to FactSet.
“We can’t say the reaction is going to mirror 2011,” Hughey said. “One the one hand, we have another rating action that could potentially change the perception of U.S. creditworthiness.”
At the same time, the concerns that Fitch cited for the downgrade could also create anxieties in the market, driving investors to assets traditionally viewed as being a safe haven, he said.
Fitch said its rating downgrade stemmed from “expected fiscal deterioration,” a “high and growing” government debt burden and an “erosion of governance” in the face of repeated debt-limit standoffs and other ills.
Short-term Treasury bill yields climbed above 5% in April and have remained elevated, in part because the Federal Reserve has quickly raised its policy rate to tame inflation. The Fed again increased rates a week ago, bringing its policy rate to a 22-year high in a 5.25%-5.5% range.
Investors have been snapping up the deluge of Treasury securities issued since the June debt-ceiling deal allowed U.S. coffers to be refilled, albeit at higher borrowing costs than in the recent past.
A “tsunami” of additional issuance was expected after the Treasury Department released a $1 trillion borrowing estimate for the third quarter.
Longer 10-year Treasury yields, used to price everything from home loans to commercial real-estate debt, were at 4.048% on Tuesday, the second-highest of 2023, according to Dow Jones Market Data.
Stocks have defied expectations with a robust rally, and were trading roughly 5% off record highs. The Dow Jones Industrial Average
DJIA
was up 7.5% on the year through Tuesday, the S&P 500 index
SPX,
was 19.2% higher and the Nasdaq Composite Index
COMP,
was up 36.5% in 2023, according to FactSet.
Related: Why another cut to AAA U.S. credit rating could derail the stock-market rally
Moody’s Investors Service still has a top Aaa rating for the U.S., with a stable outlook.
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