Rating agencies are closely following US elections
When Americans go to the polls, some of the most influential observers of the electoral process will be the agencies that determine the country’s credit rating..
The country’s near-top-notch rating reflects, in part, the dollar’s status as the world’s reserve currency and the fact that the US Treasury bond market, estimated at about $ 20 trillion, is the largest and most liquid in the world..
However, two of the three major US credit agencies, Fitch Ratings and Moody&# 39; s Investors Service, which gives the United States the highest AAA and Aaa ratings, respectively, are observing the election and claiming that anything but a smooth transition or maintenance of power is a cause for concern..
Third major agency, Standard & Poor’s, estimates the country’s long-term debt at AA +, just below the highest level, in part due to financial problems. S&P also cites political divisions as a factor in limiting his ratings..
«If after election day we do not have clear election results, we will follow the process very closely.», – said William Foster, Senior Loan Officer, Moody’s.
Fitch Analyst Charles Seville in a recent report, the agency said the agency would also track the election according to business as usual amid rising mail-order and logistics problems at polling stations. He wrote that the current high score depends on the processes «transfers of power that are universally accepted and implemented».
When asked about the potential election uncertainty this year, Representative S&P said his current views are reflected in an April 2 report that cites party support as a rating cap..
The focus on the November 3 national and state election process is due to the fact that the President of the United States Donald Trump expressed a controversial opinion about whether he would yield power if he lost.
So far, agencies have maintained their US ratings despite the economic crisis and financial stress caused by the COVID-19 pandemic..
Downgrading the US credit rating to a lower level or adding a negative outlook may not immediately hit the value of US Treasury debt, investors say.
Justin Hoogendorn, Piper Sandler, head of fixed income strategy, said the downgrade is likely to have little impact, at least in the short term, on investor perception of Treasuries as a defensive asset..
When in 2011 S&P downgraded the U.S. long-term rating by one notch due to growing deficits and higher levels of debt, Treasuries rallied as investors bought them as safe assets.
If Moody&# 39; s, Fitch or both will join S&P due to the downgrade of the US rating, this will effectively mark the end of the long-term outlook for the country’s AAA ratings, and while Treasury prices themselves may remain at the same level, this could spoil the picture for riskier assets, as happened in August 2011..
Prolonged tensions at the time, including a congressional fight for a debt ceiling, eroded the perceived security of US bonds. The credit default swap on the benchmark 10-year Treasury bond USGV10YUSAB = R, which measures the cost of insuring US government debt, roughly doubled in August 2011 from the prior year.
Late Friday night Moody agency&# 39; s downgraded the UK sovereign debt rating from Aa2 to Aa3, but the yield on benchmark 10-year bonds GB10YT = RR ended trading on Monday with a decline of 0.171%.
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«We do not think that the delay in the election results will raise any doubts about the viability of the largest sovereign bond market in the world.», – said Charlie Ripley, Senior Investment Strategist Allianz Investment Management.
One reason to expect bond behavior is calm is the expectation that the US Federal Reserve will intervene to quell volatility..
«In short, the markets will turn to the Fed again», – considers Omar Slim, Fixed Income Portfolio Manager, PineBridge Investments in Singapore.
Investors doubting the viability of US assets have alternatives in the form of sovereign debt in other countries such as Switzerland and Japan, believes Eric Weissman, Portfolio Manager at MFS Investment Management in Boston. Weissman said MFS held internal negotiations to find out what the country’s debt could be an attractive safe haven.
«If you do not feel eminently confident that the legal system will support your claims for assets and, in particular, Treasury bonds, then you may not consider the United States as the safest place.», – said Weissman.