Fitch Issues Warning Shot Across Government’s Bow


Kevin Gale, Managing Director, Head of Fixed Income

The United States has long been considered the bellwether credit for investors across the globe. In recent years, mounting debt resulting from significant spending during the 2008 financial crisis and most recently the pandemic has some concerned about the trajectory of the U.S. debt load.

Fitch Ratings, one of the major credit rating agencies in the United States, voiced its concern over the U.S. debt load this week. Fitch downgraded the U.S. credit rating one notch from its highest possible rating of AAA to AA+. The downgrade reflects the mounting debt the U.S. has been experiencing and a perceived deterioration in faith of the U.S. Government to address the fiscal and debt issues.

The rating downgrade in and of itself should not have much of an impact on the U.S., if at all. United States Treasury securities (of which there are approximately $32.6 trillion outstanding) are one of the most liquid trading instruments in the world. They are used for all kinds of financial transactions including; investing, trading, hedging, collateral and most importantly funding the U.S. deficit. For the financial markets to change how treasury securities are used would be a massive undertaking that would likely take years and require significant adaptation.

The rating downgrade could become a political weapon for both Democrats and Republicans. The headline risk from both political parties that could result from the debt downgrade may result in some market volatility. Should this occur, we believe it would offer investors opportunities to take advantage of any meaningful market sell-offs to add to quality assets.

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