US Treasury yields lower after Fitch downgrade.
US Treasury yields lower after Fitch downgrade.
U.S. Treasury Yields Dip as Fitch Downgrades Credit Rating
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In a twist of events, U.S. Treasury yields have dipped in Tokyo after Fitch, a renowned ratings agency, lowered the country’s top credit rating[^1^]. This news has sparked interest and concern among market analysts and investors alike.
Fitch’s overnight decision to downgrade the U.S. government’s rating to AA+ from AAA has been attributed to expectations of a fiscal deterioration over the next three years and a growing government debt burden[^1^]. The agency had already put the rating on watch for a possible cut back in May. Now, with the downgrade official, it is expected to trigger risk aversion flows as Asian markets reopen[^1^].
“This will likely spark risk aversion flows as Asian markets re-open,” noted Tony Sycamore, a markets analyst at IG, in a report to clients[^1^]. Risk aversion typically leads to a decline in equities, with investors seeking safer haven assets such as the Japanese yen, Swiss franc, and U.S. Treasuries[^1^].
Interestingly, this is not the first time U.S. Treasuries have seen increased demand in times of credit rating downgrades. Back in 2011, when Standard & Poor’s cut the U.S.’s top ‘AAA’ rating to ‘AA-plus’, a similar scenario unfolded[^1^]. This unexpected demand for Treasuries in the midst of credit rating downgrades can be attributed to their status as a safe haven investment.
The timing of Fitch’s downgrade is noteworthy, as it comes just two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement. This agreement was reached after months of political brinkmanship and raised the government’s debt ceiling to $31.4 trillion[^1^]. While this agreement temporarily eased concerns about a potential debt crisis, Fitch’s downgrade raises questions about the long-term sustainability of the U.S.’s fiscal outlook.
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The impact of Fitch’s move has been felt in the bond market, with the 10-year Treasury note experiencing a decline of approximately 3.2 basis points (bps) to 4.015%[^1^]. This retracement partially offsets the 9 bps increase from the previous day. It remains to be seen how the market will react in the coming days and whether this downgrade will have a lasting impact on U.S. Treasury yields.
For now, market participants are closely monitoring the situation, particularly how other credit rating agencies will respond and what implications this downgrade may have on investor sentiment.
References:
[^1^] U.S. Treasury Yields Dip as Fitch Downgrades Credit Rating
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