The Fitch rating service lowered its sovereign rating on US debt from AAA to AA+. S&P lowered its rating on US government debt a decade ago to AA+, so this is not the first rating downgrade. The market reaction was muted on the announcement, but it seems the current market talk is causing some market uncertainty on the future debt picture.
Hard to say there was any surprise with this change. The report was very clear in its analysis. The argument for the downgrade was based on the likelihood of further deterioration of US finances over the next three years given tax cuts, spending increases, potential economic shocks, and the ongoing gridlock associated with debt ceiling crises. Treasury Secretary Yellen disagreed with the Fitch assessment and said the downgrade was "arbitrary" and "outdated".
Of courses the Treasury is planning to float over 1 trillion in new debt this quarter and over $850 billion in the fourth quarter. This is just after the recent debt ceiling deal was closed. I guess a trillion dollar in one quarter is just not a big deal anymore.
There is the adage that governments cannot go bankrupt. Obviously, the power to tax can solve any problem, but we were just on the brink of a default two month ago and nothing in the financial picture changed.
The market already believes what Fitch has stated in its report. To a degree, the US Treasury is too big to fail. As the most liquid debt market, there are no alternatives, yet it is likely that we could see a default in the next three years. Anyone who does not believe the probability of default is meaningful has just not been following the bond market or followed any of the debt ceiling debacle.
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