Fitch’s US Debt Downgrade Dismissed by Some, But Could be Driving Long-Term Rates Higher

A downgrade of the US’s sovereign debt by Fitch Ratings, from AAA to AA+, has been widely dismissed by government officials. However, it may now be playing a material role in spiking long-term rates. Treasury yields across the back end of the curve, from 10 to 30-year notes, have experienced a surge to multi-month highs in the wake of Fitch’s adjustment, potentially pricing a greater amount of risk inherent in US bonds.

Fitch cites “expected fiscal deterioration” and “repeated debt-limit political standoffs” as key rationale behind their decision. With overnight rates now set at multi-decade highs by the Fed, forcing the government’s debt expenditures to rise by 50% YoY, it’s hard to disagree with the assessment that the US may see its ability to easily service debt diminish. Though the debt ceiling has successfully been raised nearly 80 times since 1960, congressional upheaval regarding the government’s ever-expanding deficits seems to be intensifying.

Related ETFs: ProShares Short 20+ Year Treasury (TBF), ProShares Short 7-10 Year Treasury (TBX)

Yields on long-dated US treasuries are soaring to multi-month highs in the wake of Fitch Ratings’s downgrade of the US’s sovereign credit rating from a pristine AAA rating to a more modest AA+. The yield on the 10-year treasury for instance, had shot up above 4.18% on Thursday morning, surpassing previous 2023 highs seen in early March, just prior to a spate of US bank failures, which included the second largest on record with Silicon Valley Bank (SVB) entering receivership. Yields on the 30-year note also soared to their highest level since November 2022, surpassing the 4.29% threshold. The move higher in yields could be partially related to a hawkish adjustment among rate hike expectations, following a stronger-than-expected GDP reading for Q2, but part of it is likely related to the reality that at least one major ratings organization sees US debt as slightly more risk-intensive.

It isn’t the first time the US has experienced a credit downgrade, as S&P slashed the rating of US government debt to AA+ in August 2011, meaning that two out of the big three credit rating agencies (with Moody’s being the exception) now see the US’s bonds as less creditworthy than those issued by the nine countries who still maintain the highest ranking possible among each of the big three. Per Bloomberg, that list includes Germany, Denmark, the Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore, and Australia. The reaction from many US government officials has been largely dismissive, with the White House essentially finger-pointing at the prior administration regarding Fitch’s citation of “a steady deterioration in standards of governance over the last 20 years”. By that standard, the administration of…