Fitch Ratings\u2019 decision to cut the U.S. government\u2019s top AAA rating ahead of Wednesday\u2019s quarterly refunding statement from the Treasury has left investors, analysts and officials weighing the likely impact on the agency\u2019s $1 trillion third-quarter borrowing plans. <\/p>\n
For now, that impact appears to be rather muted. Describing U.S. government debt as still the safest and most liquid asset in the world, Josh Frost,\u00a0U.S. Treasury\u2019s assistant secretary for financial markets, told reporters on Wednesday that officials were seeing continued robust demand and no signs of forced selling. He also said Fitch\u2019s move isn\u2019t expected to have any direct impact on the department\u2019s borrowing plans, and there\u2019s no effect on funding costs yet. <\/strong><\/p>\n Earlier this week, Treasury released a\u00a0$1.007 trillion borrowing estimate\u00a0for the third quarter that is the largest ever for that time frame, raising questions about the extent to which foreign and domestic buyers can continue to keep up their demand for U.S. government debt. It\u2019s not just demand that\u2019s been of concern, but also the risk that higher funding costs could, in turn, exacerbate the government\u2019s fiscal deficit.<\/p>\n In 2011, when Standard & Poor\u2019s downgraded the U.S.\u2019s credit rating to AA+ from AAA, investors counter-intuitively flocked to Treasurys for safety. That experience, which left many in financial markets unscathed, may be helping to mitigate the fallout of Tuesday\u2019s decision by Fitch. The timing of Fitch\u2019s move \u201cwas a surprise, but drew attention to an ongoing deterioration in the fiscal trajectory\u201d that many already knew about, according to Steven Zeng, a New York-based strategist at Deutsche Bank While Fitch\u2019s downgrade is \u201ca negative for sure, the fallout from the 2011 downgrade was pretty limited,\u201d Zeng said via phone on Wednesday. <\/p>\n Over the next couple of weeks or months, \u201cif the equity market shakes this off, yields probably\u00a0move higher because of concerns about increased Treasury issuance,\u201d he told MarketWatch. \u201cIf the equity market thinks this is somehow the straw that breaks the camel\u2019s back because it disrupts market functioning or economic growth \u2014 and it sells off \u2014 yields could actually decline on greater safe-haven demand for Treasurys.\u201d That demand could even help to offset any impact from higher funding costs in the future, according to Zeng. <\/p>\n See also: <\/strong>$25 trillion Treasury market is in the spotlight as U.S. loses its AAA rating for a second time<\/p>\n \n \u201c<\/span> \u2018There is still strong demand for the safe haven asset that is U.S. Treasurys.\u2019 \u201d<\/span>\n <\/p>\n
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