Morning Market Brief: Thursday, August 3, 2023

Fitch downgrades U.S. long-term government debt?

Fitch Ratings has downgraded long-term U.S. government debt. A couple of months ago, Fitch put U.S. debt under watch as the government haggled over the debt ceiling. The downgrade could create some uneasiness among investors, elevating concerns about the U.S. government’s fiscal outlook.?

• Fitch Ratings has downgraded the U.S. long-term foreign-currency issuer default rating from AAA to AA+, and assigned a stable outlook. This is the first downgrade in U.S. government debt since 2011 when S&P Global downgraded U.S. government debt to AA+, where it remains today.
• Fitch cited several reasons for its downgrade. The ratings agency believes the fiscal situation in the U.S. is likely to weaken over the next few years given increased spending combined with tax cuts. Furthermore, the frequent standoffs on the U.S. debt ceiling in recent years have weakened confidence in the government’s fiscal management.
• The ratings agency expects the government’s deficit to rise to 6.3% of gross domestic product in 2023, up from 3.7% last year. While the deficit is growing, the economy is expected to weaken, potentially falling into a recession, in response to a slowdown in consumer and business spending, according to Fitch.
• As expected, lawmakers in Washington largely disagreed with the ratings downgrade. U.S. Treasury Secretary Janet Yellen largely dismissed the downgrade, referring to it as “arbitrary.” However, this is likely to become a topic of debate at the next Presidential election.

Global equity markets were weighed down on this news yesterday, while the change in yields on U.S. Treasury bonds was relatively mild, considering the downgrade. Speaking to Bloomberg, many economists and market strategists expect minimal impact on financial markets over the medium term. However, ratings downgrades often weigh on investor confidence. Still, U.S. Treasury bonds are likely to remain a safe-haven asset, making them an important component of investment portfolios, particularly given so much uncertainty in the global economy.

At?CIBC Private Wealth, we aim to take a comprehensive approach to managing, building and protecting your wealth. If you'd like to discuss this market and economic update in more detail, please get in touch with your advisor any time.