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August 2, 2023 | Premium Service | As this edition of The Institutional Risk Analyst was going to press last night, Fitch Ratings downgraded the United States from “AAA” to “AA+” in an unexpected move. Given that the US is going to run a deficit of over $2 trillion in 2023, we think the Fitch action is appropriate and long overdue. Among the two remaining agencies with “AAA” ratings, Moody's Corp (MCO) and Kroll Bond Rating Agency, who will be the last to recognize the obvious deterioration in US credit standing?
S&P was the first to call out the growing lack of fiscal discipline in Washington, downgrading Uncle Sam to "AA+" in 2011. Given the trajectory of federal spending, even a resumption of QE may not be sufficient to avoid a US debt default and eventual restructuring. But more important, will the downgrade and rising long-term interest rates be sufficient to push dollar swaps back into a premium market after a decade of fixed/floating swap contracts trading through Treasury yields? The blue line shows US Treasury yields. The green line is dollar swaps out to 50 years.