If You Only Have a Minute:

• Fitch Ratings downgraded the United States’ credit rating from ‘AAA’ to ‘AA+’.
• Reasons for the downgrade include the country’s repeated debt limit clashes (recall the debt ceiling crisis earlier this year) as well as a growing debt burden.
• This has happened before: S&P Global, another credit-rating agency, was the first to downgrade the US in 2011.
• History suggests that we can expect near-term market volatility, but like the historic 2011 downgrade, the medium to long-term impact is minimal.
• Prominent policy makers, economists, and analysts have largely dismissed the concerns highlighted by Fitch, which was already widely known before the downgrade.
• No direct implication to portfolio positioning. Our portfolios remain well-balanced to capture medium-term recovery while being resilient in volatile markets. Initial price reaction to the news has been limited.

Current US Credit Ratings by the ‘Big Three’ Rating Agencies

“Treasury securities remain the world’s preeminent safe and liquid asset”
US Secretary of the Treasury, Janet Yellen

“We did not see any evidence of that in 2011” Referring to any forced selling of treasuries in the
S&P downgrade in 2011.”
US Treasury Assistant Secretary for Financial Markets, Josh Frost

“We do not believe that the downgrade reflects new material information concerning the soundness of the US Government.” PIMCO

“We do not believe there are any meaningful holders of Treasury securities who will be
forced to sell due to a downgrade”Goldman Sachs

What Happened?

In what seems like a significant development, Fitch Ratings (one of the big three credit-rating agencies) downgraded the United States’ credit rating one notch down from the highest quality AAA to AA+. The downgrade has been triggered by an “erosion of governance” that has led to repeated debt limit clashes. Fitch also highlighted the growing government debt burden in the US. This has led to a barrage of headlines and questions from investors about the potential implication of a downgrade in the largest economy in the world. Alongside such concerns, prominent figures have largely dismissed any concerns regarding the downgrade. Treasury Secretary Janet Yellen called the downgrade “outdated”, and that Treasury securities remain the world’s preeminent safe and liquid asset.

This Has Happened Before: Echoes of 2011

The Fitch downgrade mirrors the actions taken by Standard & Poor’s in 2011, which also resulted in a downgrade of US to AA+ in response to a similar debt-ceiling crisis back then. Despite the historic event (it was the first time the US lost its top AAA rating since it was assigned in 1941), the downgrade did not have any lasting impact.

Market Reaction: Then and Now

Markets saw relatively limited moves in reaction to the news of downgrade, though there was some volatility as markets digest the news. Global equities and bonds fell 1.64% and 0.13% respectively on 2 August 2023, in the immediate response to the event. It should be noted that the sell-off is coming on the back of two months of gains in June and July, and traders may also be using the downgrade as a chance to take profits.

Investors should be prepared for some near-term volatility, but remain invested to capture
the medium to long-term return potential of markets. The downgrade by S&P in 2011, while initially met with a sharper sell-off compared to today (back then, global equities fell more than 5% in reaction to the S&P downgrade), did not lead to a long-term downturn in the markets or the broader economy.

Our Positioning

The event has no direct implication for our portfolio positioning. Our portfolios remain well-balanced to capture medium-term recovery while being resilient in volatile markets. The initial price reaction to the news has been limited, with our stability positions (which saw more muted declines of less than 1%) providing an additional buffer in volatile markets.

Such unpredictable events emphasize the importance of having a strategy to invest. In the short-term markets are noisy and volatile, but long-term investors may use such periods to accumulate their positions to improve their long-term returns. Our strategies are designed to ride through such volatile periods while capturing opportunities, so do not fear!