Fitch downgrades top-tier US credit rating to AA+ from AAA

Rating agency Fitch downgraded the US government’s top credit rating, a move that drew an angry response from the White House and surprised investors, coming despite the resolution of the debt ceiling crisis two months ago.

Traders’ immediate response was to embark on a safe-haven push out of stocks and into government bonds and the dollar.

Fitch downgraded the United States to AA+ from AAA, citing fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.

Fitch had first flagged the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved, saying it intended to finalise the review in the third quarter of this year.

Wall Street futures tumbled on Wednesday after rating agency Fitch’s move to downgrade the US government’s credit rating hit appetite for risky assets around the world.

Fitch downgraded the United States to AA+ from AAA, citing fiscal deterioration over the next three years as well as a growing general government debt burden, making it the second major rating agency after Standard & Poor’s move in 2011 to strip the country of its triple-A rating.

The yield on US 10-year Treasury notes slipped to 4.02 per cent. Safe havens gold and the Japanese yen rose, while the dollar index edged higher.

“Though the US now holds two AA+ ratings, we think the latest downgrade does not reflect any new fiscal information and should only have a limited market impact,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note.

With the downgrade, it becomes the second major rating agency after Standard & Poor’s to strip the United States of its triple-A rating. Fitch’s move came two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement that lifted the government’s $31.4 trillion borrowing limit, ending months of political brinkmanship.

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.

US Treasury Secretary Janet Yellen disagreed with Fitch’s downgrade, in a statement that called it “arbitrary and based on outdated data.” The White House had a similar view, saying it “strongly disagrees with this decision”.

“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,” said White House press secretary Karine Jean-Pierre.

Analysts said the move shows the depth of harm caused to the United States by repeated rounds of contentious debate over the debt ceiling, which pushed the nation to the brink of default in May. “This basically tells you the US government’s spending is a problem,” said Steven Ricchiuto, US chief economist at Mizuho Securities USA.

Fitch said repeated political standoffs and last-minute resolutions over the debt limit have eroded confidence in fiscal management.

Michael Schulman, chief investment officer at Running Point Capital Advisors said the “US overall will be seen as strong but I think it’s a little chink in our armour.” “It is a dent against the US reputation and standing,” said Schulman. Others expressed surprise at the timing, even though Fitch had flagged the possibility.

“I don’t understand how they (Fitch) have worse information now than before the debt ceiling crisis was resolved,” said Wendy Edelberg, director of The Hamilton Project At The Brookings Institution in Washington DC.

US stock futures dropped in European trading, suggesting the benchmark indices could open sharply lower later on.

The yield on the benchmark US Treasury note fell 2 basis points on the day to 4.03 per cent, while the cost of insuring US sovereign debt against default held largely unchanged on the day, reflecting a sense of calm among investors about the longer-term impact of the downgrade.

“I don’t think you are going to see too many investors, especially those with a long-term investment strategy saying I should sell stocks because Fitch took us from AAA to AA+,” said Jason Ware, chief investment officer at Albion Financial Group.

Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, the lower a borrower’s rating, the higher its financing costs.

“This was unexpected, kind of came from left field,” said Keith Lerner, co-chief investment officer at Truist Advisory Services in Atlanta. “As far as the market impact, it’s uncertain right now. The market is at a point where it’s somewhat vulnerable to bad news.”