abrdn: Lower US credit rating seems 'completely justified'
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James Athey, Investment Director at abrdn, comments on the decision of credit rating agency Fitch to downgrade the US credit rating.
'While there has been some pushback from within the administration, the reality is that the downgrade of the US rating seems entirely justified. Debt to GDP is now over 100%, versus a sovereign AAA average of around 40%, and is projected to rise significantly in the coming years.
Interest costs have risen significantly, both outright and as a percentage of the overall budget, and even at the end of what has become quite a significant cyclical upswing, the US is still running a budget deficit of more than 6%. It has also been clear over the last several years that neither the Democrats nor the Republicans are willing to set fiscal policy on a more sustainable path.
Implications for the pricing of US Treasury yields should be relatively minor from the downgrade itself as relatively few assets are benchmarked against AAA benchmarks, particularly in recent years as the universe has shrunk.
A far greater impact on yields is being felt from the increase in UST supply resulting from the huge pro-cyclical deficit. Combined with the ongoing disinflationary process, solid economic data but increasing monetary headwinds, we expect longer dated UST to continue to underperform on the yield curve.'