Treasury Downplays Fitch Rating, Sees ‘Limited’ Yield Impact at Most

2023-08-02 23:26

A senior Treasury official said there’s limited implications for the price of government debt from the move by

A senior Treasury official said there’s limited implications for the price of government debt from the move by Fitch Ratings to cut the US’s AAA sovereign rating.

“We see limited or no impact on yields or prices,” Treasury Assistant Secretary for Financial Markets Josh Frost told reporters Wednesday. “What we are seeing, in the immediate response, is a very limited price response in markets.”

Frost spoke at a briefing on the government’s latest plans for debt issuance. Earlier Wednesday, the department unveiled the first increase to a quarterly auction of notes and bonds in more than 2 1/2 years.

Read More: US Plans $103 Billion Debt Sale, as Issuance to Keep Rising

Treasuries slid in trading on Wednesday in the wake of stronger than expected US jobs data, and accelerated their selloff following the bigger-than-expected plan for increased debt issuance. Ten-year yields hit the highest level since November, and were at 4.11% as of 10:54 a.m. in New York.

Late Tuesday, Fitch cut the US credit grade one level, to AA+. That came two months after it warned the rating was under threat as lawmakers flirted with default by battling over raising the nation’s debt limit.

Goldman’s Take

Frost said he sees no forced selling from buyers of Treasuries as a result of Fitch’s removal of the top rating status. That, Frost said, would mirror the lack of such moves that happened in 2011, in wake of S&P Global Ratings one-step downgrade US debt from AAA.

“We did not see any evidence of that in 2011,” Frost said with regard to the idea of forced selling.

“We continue to see robust demand for Treasury securities and the decision last night doesn’t change what American investors and people all over the world already know — which is that Treasury securities remain the world’s preeminent safe and liquid asset and that the American economy is fundamentally strong,” Frost said.

The Treasury isn’t alone in its view.

“We do not believe there are any meaningful holders of Treasury securities who will be forced to sell due to a downgrade,” Goldman Sachs Group Inc.’s Jan Hatzius wrote in a note with colleagues. “Because Treasury securities are such an important asset class, most investment mandates and regulatory regimes refer to them specifically, rather than AAA-rated government debt.”