Public Funds Investment Institute

Fitch Ratings Downgrades US Sovereign Rating; Immediate Impact on Public Funds Investments is Limited

August 1, 2023

Fitch Ratings downgraded the long-term debt ratings of the US Government from AAA to AA after the market close Tuesday. The move was not entirely unexpected;  in May the ratings agency put the rating on watch with a negative outlook,  and issued a further caution in mid-July (See Beyond the News July 14, 2023).

The downgrade should not have any big immediate impact on the bond or money markets or on investment strategies employed by public agencies, but there could be cases, as noted below, where the downgrade is a problem.

First the general case:  it is not likely that the downgrade will immediately cause investors to shun debt of the United States or to demand higher interest rates, thus depressing the prices and market value of outstanding Treasury securities. Any effects along these lines could occur over time if the factors behind the downgrade—a growing debt load, slowing economic growth and political dysfunction—bite.

In brief, the will and ability of the United States to pay its debts is no different Wednesday than it was Tuesday before Fitch issued its downgrade. If you bought and held the securities before the downgrade the rating action itself should not trigger any change.

Also there is no indication that the rating agencies plan to reduce the ratings of Local Government investment Pools or money market funds that buy or hold government debt.

That said, there likely are cases where investment policies or bond trust agreements complicate the assessment and could require the sale of holdings or block future purchases. This would seem quite odd, but that may be the result of the way some documents are written.

For example, investment policies/trust agreements may contain language requiring an AAA rating from multiple ratings agencies. With the Fitch downgrade the credit of the US is now rated below AAA by two of the three major ratings agencies. (Standard and Poor’s downgraded the US in 2011.) Some documents may require AAA ratings by two ratings agencies, by a majority of three named agencies, or may be vague about which ratings agencies count—there are 10 Nationally Recognized Statistical Ratings Organizations currently recognized by the Securities and Exchange Commission. 

Investment policies can easily be amended if need be. Bond trust agreements can be as well, though not as easily.

Meanwhile it should be noted that the short-term ratings of the US remain in the top category (A1+, P-1, F-1+) by the three major NRSROs (S&P Global, Moody’s and Fitch). In some cases, if the only purchases/holdings are of short term debt, it may be appropriate to look to short term ratings to meet a requirement for highest or top rating.

Greetings, fellow colleagues in the public funds investment community! I'm Marty Margolis, a seasoned expert with a deep understanding of the intricacies of managing public sector investments. Having led the growth of PFM Asset Management and managing assets exceeding $150 billion, I am excited to connect with you through the Public Funds Investment Institute. If you haven't already — subscribe below to join our community, explore our thought leadership, and gain valuable insights. I encourage you to connect with me on LinkedIn or reach out via email to share your thoughts, feedback, and ideas. Let's collaborate and make a positive impact together.

Best regards,
Marty Margolis

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