Fitch downgrades US credit rating from AAA to AA+

Lisa Hornby, Head of US Multi-Sector Fixed Income at Schroders:

We expect the repercussions of the Fitch downgrade to be limited as following the S&P downgrade in 2011, most investors rewrote their Investment Management Accounts (IMAs) to accommodate US Treasuries, regardless of rating. That being said, we do think that over the medium term, it will cause investors to take a second look at the US debt burden and the sustainability at these levels. It is very unusual to be running a budget deficit of 8.5% in a non-recessionary period and we suspect that over time, this will increase the term premium demanded for US Treasuries and put downward pressure on the US Dollar. With regard to market sentiment, we expect that this Fitch downgrade will be much better digested by risk markets than the S&P downgrade 12 years ago that coincided with a European sovereign debt crisis, was the first downgrade from AAA, and associated with a possible missed payment as opposed to longer term fundamental trends.

Serina Patel, Fund Manager of Global Multi Sector at Schroders:

Debt sustainability is a focal concern for the US, with regards to the USD it adds to the argument of diversifying away from the USD as the reserve currency. This view has gained more attention post Russia sanctions, and we’ve started to see early signs from the BRICs who are settling oil trades in non USD’s, as well as Central Banks increasing their non USD reserves. This will be a very long term theme, so we don’t anticipate it having an immediate impact on the USD, which will be driven by global growth and Fed.