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.
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