U.S. credit rating downgrade summary

» Fitch criticizes the erosion of governance that has led to repeated congressional debt ceiling clashes over the past 20 years. Last May, when the Congress was in confrontation over the debt ceiling, it gave the same reason and warned of a credit rating downgrade, and it has finally come true. As of today, the highest grade AAA has been demoted to AA+, one level below.

» Claims that tax cuts and new fiscal spending initiatives by the U.S. government have combined with unfavorable economic conditions to widen the budget deficit, and that the medium-term challenges of rising welfare costs remain largely unresolved.

» Treasury Secretary Yellen responded to Fitch's decision as "arbitrary and outdated". U.S. Treasuries are still the safest and most liquid asset in the world

» Fitch expects national debt to reach 118% of GDP by 2025, more than 2.5 times higher than the median national debt of AAA rated countries of 39.3%.

» In any case, the action will have the biggest impact on the government bond market. At the beginning of the Asian market today, government bond yields are rather falling. Some claim that, at face value, it has damaged the reputation of the United States, but it is a buying trend that promotes risk-off (safety asset preference) phenomenon in the market.

» The Treasury is preparing to increase its long-dated bond issuance to $159B in July-September. During the same period, long-term bonds sold due to the Fed's QT were $180B. In other words, long-term bonds worth $339B will be supplied by September (reference: Macro Jungle for Tarzan)

» Credit rating downgrade + increase in long-term bond issuance + risk-on phenomenon (preference for risky assets) = a situation in which there are many factors that stimulate market interest rates to rise. Therefore, it is necessary to be careful when purchasing government bonds.

» 4% on a 10-year note, but investors are still not attracted to bonds. The ERP (Equity Risk Premium), which represents the difference in yield between stocks and bonds, is at its lowest level since 2002. Then, at what level should the market interest rate be attractive to investors? I think this ultimately depends on the possibility of a recession.

» The thing to note about the credit rating downgrade is that it is only the action of the pitch. Moody's still rates the US at Aaa, its highest credit rating. It is up to the investor to see this as an important factor.