US credit is no longer #1

Fitch Ratings has downgraded America's credit rating from the highest-possible “AAA” to a meagre “AA+”... just like its northern neighbour.   

Catch-up: The credit grader threatened to downgrade the US in May because Congress had not worked out a debt-ceiling deal to avoid throwing the country into default. The US then did strike a deal to avoid hitting the debt ceiling, but Fitch had moved on to other issues. 

Driving the news: Per Bloomberg, the credit grader justified the shift by arguing the “country’s finances will likely deteriorate over the next three years given tax cuts, new spending initiatives, economic shocks, and repeated political gridlock.” Sounds harsh!

Why it matters: Investors use credit ratings, like Fitch, S&P Global, and Moody’s, to assess the riskiness of a country's bonds. For instance, a recent UN study shows African countries have lost billions because of bad ratings, which they argue are unfairly measured.

  • Bonds offer investors a reliable income stream through interest payments (calculated based on the riskiness of the debt) and allow the issuing country to raise money. 

Yes, but: That’s not what’s happening here. Nobody’s rushing to sell their US Treasury securities because of a second-best rating. They’re US Treasuries for crying out loudand are still seen as the safest haven asset and the most reliable source of collateral. 

  • Market reactions were muted because Fitch isn’t saying anything investors don’t already know, between “the government is polarized” and “the US has a lot of debt.”

Bottom line: The downgrade won’t change much day-to-day, but it’s still a spotlight on the worsening outlook for the US financial system.—SB