The downgrade, the first by a major ratings firm in more than a decade, is evidence that increasingly frequent political skirmishes over the U.S. government’s finances are clouding the outlook for the $25 trillion global market for Treasurys. Fitch’s rating on the U.S. now stands at “AA+”, or one notch below the top “AAA” grade.SourceMoneyGuru-https://www.mgkx.com/5027.html
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America’s reputation for reliably making good on its IOUs has cast Treasury bonds in an indispensable role in global markets: a safe-haven security offering nearly risk-free returns. Treasurys serve as a critical benchmark for returns on stocks and other bonds, because investors generally demand greater yields on any other securities that they buy.SourceMoneyGuru-https://www.mgkx.com/5027.html
Few investors believe that Fitch’s downgrade will immediately challenge that role. Still, it is the first time a ratings firm lowered its headline assessment of the U.S. government’s propensity to pay its bills on time since Standard & Poor’s in 2011 lowered its rating one notch below the top grade. That decision followed another tense debt-ceiling standoff in Congress.SourceMoneyGuru-https://www.mgkx.com/5027.html
Moody’s, the other member of the three big U.S. ratings firms, continues to give the U.S. its strongest assessment.SourceMoneyGuru-https://www.mgkx.com/5027.html
Fitch said Tuesday that the downgrade reflects an “erosion of governance” in the U.S. relative to other top-tier economies over the last two decades.SourceMoneyGuru-https://www.mgkx.com/5027.html
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said.SourceMoneyGuru-https://www.mgkx.com/5027.html
Biden administration officials criticized Fitch’s decision, blaming governance problems on the Trump administration and arguing that the U.S. wasn’t at risk of missing its debt payments.SourceMoneyGuru-https://www.mgkx.com/5027.html
“The change by Fitch Ratings announced today is arbitrary and based on outdated data,” Treasury Secretary Janet Yellen said in a statement.SourceMoneyGuru-https://www.mgkx.com/5027.html
Administration officials said Fitch staff, in justifying their concerns over the U.S. political system, repeatedly raised the events of Jan. 6, 2021, when supporters of former President Donald Trump stormed the capital saying the 2020 election was stolen.SourceMoneyGuru-https://www.mgkx.com/5027.html
Trump was indicted Tuesday for his efforts to overturn his loss to Biden in that election. He has denied wrongdoing, and has repeatedly accused prosecutors of pursuing him for political reasons.SourceMoneyGuru-https://www.mgkx.com/5027.html
Congress passed legislation suspending the government’s borrowing limit in early June, just days before the deadline Yellen had given for when the government would become unable to pay all of its bills on time.SourceMoneyGuru-https://www.mgkx.com/5027.html
The eventual compromise, which set caps on federal spending and raised the debt limit for roughly two years, came after months of deadlock between Democrats and Republicans. Republicans had demanded spending cuts in an echo of previous clashes over government borrowing, which Democrats resisted for months. During the impasse, Fitch said it was considering downgrading the U.S.SourceMoneyGuru-https://www.mgkx.com/5027.html
Fitch said it expects the general government deficit to rise to 6.3% of gross domestic product in 2023 from 3.7% last year. The expected deficit growth reflects cyclically weaker federal revenues, new spending initiatives and a higher interest burden, Fitch said. The firm expects the U.S. economy to slip into a recession later this year.SourceMoneyGuru-https://www.mgkx.com/5027.html
What does this mean for investors?
The downgrade by Fitch is a negative development for investors, as it suggests that the U.S. government is now seen as a riskier borrower. This could lead to higher interest rates on Treasury bonds, as investors demand a premium for taking on more risk.SourceMoneyGuru-https://www.mgkx.com/5027.html
It is also possible that the downgrade could lead to a decline in the value of Treasury bonds, as investors sell them off in favor of other assets that are seen as less risky.SourceMoneyGuru-https://www.mgkx.com/5027.html
What can investors do to protect themselves?
Investors who are concerned about the downgrade by Fitch should consider diversifying their portfolios and investing in assets that are not as sensitive to changes in interest rates. They should also consider investing in assets that are seen as less risky, such as gold or other precious metals.SourceMoneyGuru-https://www.mgkx.com/5027.html
It is also important to stay informed about the latest developments in the U.S. government’s finances and to monitor the ratings of other major countries. This will help investors to make informed decisions about where to invest their money.SourceMoneyGuru-https://www.mgkx.com/5027.html SourceMoneyGuru-https://www.mgkx.com/5027.html
