Light Wave


Fitch Downgrade of US Credit Rating: ‘Wake Up Call’ for Washington

By Jake Beardslee · August 2, 2023

Fitch downgraded the U.S. credit rating yesterday (Fitch state credit-rating map.)  Szmenderowiecki/Wikimedia Commons/CC BY-SA 4.0

Credit rating agency Fitch downgraded the United States’ credit rating Tuesday, citing the government’s high and rising debt levels and “fiscal brinkmanship” related to the debt-ceiling limit. While market analysts said the move should serve as a stark warning, most do not seem overly concerned about the near-term impacts lowered rating.

“I don’t think it’s going to be that big of a deal, but hopefully it is a wake up call with regard to the fiscal responsibility of the country,” Kathryn Rooney Vera, chief market strategist at StoneX, told CNBC. She pointed to rising fiscal deficits, high debt-to-GDP ratios, and late interest payments as areas of concern if left unaddressed.

Art Hogan, managing director and chief market strategist at B. Riley Financial, agreed that the downgrade should be a call to arms for policy change. He told CNBC, “As a government going through these debt ceiling dances every few years… Washington needs to make some distinct changes so we don’t have to walk up to the edge of the cliff every time we’re going through raising the debt ceiling,” he said, referring to the political brinksmanship in June that took place between President Biden and House Speaker Kevin McCarthey.

Analysts say ongoing global demand for US Treasuries remains strong. Even so, risks include potential yield curve impacts from Japan’s yield curve control policies, according to Rooney Vera.

While cautiously optimistic on equities, Rooney Vera advised hedging upside risk through instruments like protective puts. She favors bear steepener trades in fixed income and maintaining healthy allocations in gold and cash.

Light Wave commentary

Analysts seem unfazed by near-term market impacts and the downgrade of the U.S. credit rating, noting demand for US Treasuries remains strong worldwide. StoneX’s Kathryn Rooney Vera offered prudent advice: stay invested but hedge equity risks and rotate into areas like bear steepeners. Caution is wise given equity valuations and volatility near 3-year lows. Overall, the reactions seem balanced; the downgrade is embarrassing but not an immediate crisis. But it serves notice on the White House and policy makers to govern with fiscal discipline.