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US government debt rallied on Wednesday, despite Fitch Ratings’ unexpected decision to downgrade Washington’s top-tier sovereign debt rating, as a sell-off in stock markets drove investors into the safety of Treasuries.
Yields on two-year Treasuries fell 0.06 percentage points to 4.9 per cent, while 10-year yields were down 0.03 percentage points to 4.03 per cent. Yields fall as prices rise.
The moves came after Fitch cut the US credit rating from triple A to double A plus after markets closed on Tuesday, citing a mounting government debt burden and the debt ceiling stand-off two months ago that brought the world’s largest economy close to a default.
Investors said the lack of reaction in Treasuries reflected the fact that funds were unlikely to be forced to sell US debt as a result of the downgrade. Meanwhile, Fitch’s announcement helped fuel a global equity sell-off.
“We think the latest downgrade does not reflect any new fiscal information and should only have a limited market impact,” said Mark Haefele, chief investment officer of UBS Global Wealth Management.
“Many major Treasury holders, such as funds and index trackers, will likely have already prepared for the move to avoid having to force-sell their existing holdings. Safe-haven demand amid the downgrade jitters could also counter-intuitively support Treasuries in the short term.”
Analysts at Goldman Sachs said the Fitch move would not lead to widespread forced selling of US government debt by investors mandated to hold triple A assets 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”, they said.
In stock markets, Europe’s region-wide Stoxx Europe 600 index fell 0.8 per cent while France’s Cac 40 slipped 0.5 per cent, extending losses from the previous session. Germany’s Dax, meanwhile, lost 0.8 per cent.
London’s FTSE 100 was the biggest faller in the region, down 1 per cent, a day before the Bank of England was expected to increase its benchmark bank rate to 5.25 per cent.
Futures contracts tracking the US S&P 500 fell 0.5 per cent, following a small decline on Wall Street on Tuesday, while those tracking the tech-focused Nasdaq 100 were down 0.7 per cent ahead of the New York open.
The moves followed sharp declines in Asia, where China’s benchmark CSI 300 index lost 0.7 per cent, Hong Kong’s Hang Seng index dropped 2.5 per cent, and Japan’s Topix shed 1.5 per cent.
“We already had a soft tone in equities yesterday afternoon, prior to the downgrade, which was anchored in some of the weakness in earnings releases,” as well as the latest economic data, said Karim Chedid, head of investment strategy for BlackRock’s iShares arm in Europe, the Middle East and Africa.
A day earlier, fresh data showed US manufacturing sector activity contracted for the ninth consecutive month in July, as companies cut jobs in the face of weak demand. Separate data showed that demand for US workers reached a two-year low in June.
The US dollar slipped 0.03 per cent against a basket of six other currencies, while gold rose 0.3 per cent to $1,950.60 a troy ounce, as investors turned to haven assets.
Treasury secretary Janet Yellen issued a statement saying the rating downgrade did “not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s pre-eminent safe and liquid asset”.
The US narrowly avoided a government default in June, with the federal borrowing limit lifted at the eleventh hour following months of tension over spending cuts.
Fitch is one of three rating agencies whose decisions are closely followed by market participants around the world. Moody’s maintains its triple A rating for the US, while S&P lowered its rating to double A plus in 2011 after a debt ceiling crisis that year.
