Fitch downgrades US credit rating from AAA to AA+
On August 1, Fitch Ratings downgraded the U.S.’ long-term credit rating from AAA to AA+.While looked surprising as it came after June’s resolution to the debt ceiling negotiations, investment managers do not regard the action a surprise as Fitch Ratings had said back in May that the U.S. was under a negative rating watch, and S&P already downgrade the U.S. to AA+ in 2011.Only Moody’s, the remaining major ratings agency to maintain its AAA rating on U.S. debt. This downgrade makes the rating of the US more consistent with those of other countries: France and the United Kingdom are AA; Japan is A; and Germany, Switzerland, and Singapore are AAA.The action said anything to U.S.’s ability to repay its debt?The answer is “very little”. Fitch defines AAA borrowers exhibit “exceptionally strong capacity” to meet their financial commitments, whereas AA issuers exhibit “very strong capacity.” In investment managers’ view, the differences are more nuanced than they are pronounced.Investment managers’ outlook on the situationAs a result of the tightening of credit conditions and the cumulative effect of 5.25% of rate hikes, the U.S. economy is expected to soften in the months ahead and inflation to continue to moderate. Investment managers believe that risk markets are pricing in a relatively soft landing. The sheer volume of debt owed by governments, corporates, and individuals nevertheless means that rates don’t need to climb as far as in the past to have the identical effect. Consequently, investment managers think the Federal’s interest rate tightening cycle – increasing interest rates to cool inflation – is nearing the end, and it is positive for bond markets.Investment managers’ strategy moveLonger-dated bonds offer a wider potential for capital gains, although they also come with increased interest rate risk. Therefore, investment managers carry on favoring harvesting yields on the short end of the yield curve, while selectively adding duration* to provide much-needed defensive characteristics in the case of an economic slowdown.Global risk appetite may start rising later this year as markets ultimately look forward to and discount an economic recovery next year.What needs to be watched out for?- Some digestion of stock market gains and the potential for a minor pullback in the near term as markets reprice when the Fed begins to cut rates.
- US yields may potentially move higher because of a confluence of developments, including this downgrade.
- The issuance of more US debt.
* Duration measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates, and vice versa.Importance NoticeThis document is for general information only. The information or opinion herein is not to be construed as professional investment advice or any offer, solicitation, recommendation, comment or any guarantee to the purchase or sale of any investment products or services. This document is for general evaluation only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person or class of persons and it has not been prepared for any particular person or class of persons.The information or opinion presented has been developed internally and/or taken from sources (including but not limited to information providers and fund houses) believed to be reliable by WeLab Bank, but WeLab Bank makes no warranties or representation as to the accuracy, correctness, reliabilities or otherwise with respect to such information or opinion, and assume no responsibility for any omissions or errors in the content of this document. WeLab Bank does not take responsibility for nor does WeLab Bank endorse such information or opinion.Past performance is not indicative of future results. WeLab Bank makes no representation or warranty regarding future performance. Any forecast contained herein as to likely future movements in interest rates, foreign exchange rates or market prices or likely future events or occurrences constitutes an opinion only and is not indicative of actual future movements in interest rates, foreign exchange rates or market prices or actual future events or occurrences (as the case may be).You should not make any investment decision purely based on this document. Before making any investment decisions, you should consider your own financial situation, investment objectives and experiences, risk acceptance and ability to understand the nature and risks of the relevant product(s). WeLab Bank accepts no liability for any direct, special, indirect, consequential, incidental damages or other loss or damages of any kind arising from any use of or reliance on the information or opinion herein. You should seek advice from independent financial adviser if needed.WeLab Bank is an authorised institution under Part IV of the Banking Ordinance and a registered institution under the Securities and Futures Ordinance (CE Number: BOJ558) to conduct Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.This document is issued by WeLab Bank. The contents of this document have not been reviewed by the Securities and Futures Commission in Hong Kong. 
