Need to Know: The U.S. is downgraded. How much does it matter to markets? And the surprise asset that may benefit.

by | Aug 2, 2023 | Stock Market

Well that wasn’t the newsflash expected at 5:13 p.m. Eastern on a Tuesday.

It came out of the blue, given that the government did reach an agreement to lift the debt ceiling, and that of late the economic prospects of the U.S. appear to be improving, not deteriorating.

“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,” said Fitch. It was hard to disagree with this assessment: “In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years.” Or this one: “Over the next decade, higher interest rates and the rising debt stock will increase the interest service burden, while an aging population and rising healthcare costs will raise spending on the elderly absent fiscal policy reforms.” The chief marketer of U.S. Treasury securities, of course, didn’t like the decision. Treasury Secretary Janet Yellen said the move “does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.”

There was a reaction in financial markets focused primarily on stocks, which already had shown signs of cooling after a sensational five-month run. In fact, there was greater, not diminished, demand for the 10-year Treasury. The last time the U.S. was downgraded, by S&P in 2011, Treasurys also caught a bid, as the yield on the 10-year Treasury
fell. “Their ratings are not why …

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