Till Debt Do Us Part

Ratings agency Fitch stripped the US of its coveted AAA credit rating last week, throwing the proverbial cat among the market pigeons.

Global equities sold off, but after a strong run, a pull-back is normal and shouldn’t be of much concern by itself. More notably, the yield on US government bonds (Treasuries, or sometimes spelled Treasurys) rose, implying falling bond prices. The increase in bond yields, which takes the 10-year yield back to the highest level in this cycle, probably has less to do with the Fitch announcement and more with the ongoing resilience in the US economy implying a higher-for-longer interest rate environment.

The ratings downgrade is unlikely to affect the role of Treasuries as the bedrock of the global financial system, acting as the reference rate, the most trusted form of collateral, and the ultimate safe haven, or as a Financial Times journalist put it well this week, the financial world’s “bomb shelter.”

Credit ratings agencies rarely tell the market what it doesn’t know already, and the factors that go into a ratings decisions are usually known and discounted. Ratings agencies make periodic announcements, but the market rates in real time.

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