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Yellen Calls Fitch’s Decision to Lower US Debt Rating Entirely Unwarranted

Miguel A. Rodriguez
Miguel A. Rodriguez
03 August 2023

It seems that out of nowhere the rating agency Fitch lowered the US debt rating from AAA to AA+ yesterday. US government officials criticized the move that changed market sentiment. 

Fitch lowers US debt rating 

Unexpected news that came out at the beginning of yesterday's market session had a detrimental impact on investors' risk appetite.  

Fitch, the second-largest rating organization in the world after S&P 500, reduced the US debt rating from triple A (the highest grade) to AA+.

Fitch attributes this to the unstoppable rise in national debt and the political inability to stop it, which they classify as a concern that, if not remedied, will have an impact on the stability of US finances. 

US government officials criticized the move as absurd

The timing of this decision to downgrade US sovereign credit was unexpected. It was anticipated that this may occur during the discussions on raising the debt ceiling, but once this issue was settled, almost no one could have predicted this choice.

US government representatives have sharply criticized Fitch for making this conclusion, labelling it stupid and worthless. One such person is Treasury Secretary, Janet Yellen, who called it ‘entirely unwarranted.’

Even so, the move did have an effect on the financial sector. Risk sentiment has reportedly deteriorated in general.

Treasury bonds initially rose on the news

Treasury bonds first increased in value by serving as safe haven investments during times of crisis or market stress, but later investors sold them, increasing the yield on 10-year bonds by about 10 basis points. This decision could be more consistent with a rating downgrade.

The potential response of the US corporate credit market to a downgrade of government debt is perhaps more concerning. Credit spreads may increase in cost as US enterprises' access to finance becomes more difficult.

This is why yesterday's stock market reaction was so dramatic. The Nasdaq technology index, which is often the one most vulnerable to interest rate changes, crashed during the session with losses of more than 1.5% and was approaching the 15,477-support level from a technical standpoint. 

The US Dollar strengthened against other major currencies

As a result of the US Dollar operated as a safe haven and gained ground against all its rivals, including the Japanese Yen. The EUR/USD pair keeps moving downward in the direction of the 1.0890 support area.

Additionally, oil saw one of the market's most notable moves. Despite the fact that exceptionally low EIA inventory figures—-17.049M, well below the estimate—were released and that the figure alone should have prompted a bullish response in crude oil by indicating an increase in demand, the price of oil fell by roughly $3, trading below $80 a barrel.

The market attributes the decline to two factors: first, the United States abandoned its attempt to replenish its reserves by buying 6 million barrels due to a lack of price agreement; second, Saudi Arabia is expected to announce the end of its 1-million-barrel production cut for the month of September. 

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TECH100 monthly trading chart August 3, 2023. Sources: Bloomberg, Reuters

Key Takeaways

  • Fitch lowered the US debt rating from AAA to AA+
  • US government officials say the move is absurd and meaningless
  • Risk sentiment was shaken after the news
  • Treasury bonds rose as safe haven assets and then were sold
  • The stock market depreciated
  • The US Dollar strengthened against all its major peers
  • Oil went down to nearly $3

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Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.