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Fitch lowers U.S. Ratings. What should you do?

Fitch lowers U.S. Ratings. What should you do?

August 03, 2023

Just when we thought the debt ceiling issue was behind us, Fitch ratings officially lowered the U.S. government’s debt rating from its highest level of AAA to AA+, with a “stable outlook.” Just two months ago, before the latest debt ceiling showdown was resolved, Fitch had warned this was a possibility. 

Fitch noted three primary reasons for the downgrade: growing budget deficits, a high and growing debt level and deteriorating governance. 

We don’t believe that this downgrade will have a material impact on markets beyond some potential near-term volatility. 

  • Each of the issues noted by Fitch has been brewing for decades. The growing budget deficit is indeed a challenge that the country must face, but it isn’t a new one and it certainly isn’t a surprise to markets.
  • Previous episodes suggest that markets will look through the downgrade.
  • The U.S debt rating is the second highest that Fitch offers; only two U.S. companies – Microsoft and Johnson & Johnson – have a higher rating.
  • The U.S. dollar remains the world’s reserve currency, as even Fitch noted, which gives the US government unparalleled flexibility to finance its spending.

Other countries have AAA rates, while a host do not:

Australia AAA
Denmark AAA
Germany AAA
Netherlands AAA
Norway AAA
Singapore AAA
Sweden AAA
Switzerland AAA

United States AA+
Austria AA+
Canada AA+
Finland AA+
New Zealand AA+

Taiwan AA

Belgium AA-
Czech Republic AA-
France AA-
Hong Kong AA-
Ireland AA-
Qatar AA-
South Korea AA-
United Kingdon AA-

Source: World Government Bonds. Data as of August 2, 2023.

The bigger risk for the U.S. government and the overall economy is much more simple: higher interest rates. As rates stay higher for longer, the Treasury must roll existing debt into higher cost debt, which then becomes a drain on the budget. 

Yet even this risk will take years to play out. In the meantime, the U.S. Treasury market remains the world’s go-to asset class for (nearly) risk-free income.

At Henry Wealth Management, our recommendation remains: Build a portfolio you can live with and then live with it. Don't let news or noise cause you to react. Please contact us if you'd like to discuss further.