{"id":45016,"date":"2023-08-06T01:08:28","date_gmt":"2023-08-06T05:08:28","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/fitchs-u-s-credit-downgrade-just-confirms-what-the-markets-already-knew\/"},"modified":"2023-08-06T01:08:29","modified_gmt":"2023-08-06T05:08:29","slug":"fitchs-u-s-credit-downgrade-just-confirms-what-the-markets-already-knew","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=45016","title":{"rendered":"Fitch\u2019s U.S. credit downgrade just confirms what the markets already knew"},"content":{"rendered":"
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Fitch Ratings\u2019 downgrade of U.S. government debt is much ado about nothing.<\/p>\n

That\u2019s not because the U.S. government\u2019s credit worthiness isn\u2019t important. But the financial markets already knew everything Fitch had to say about the state of the U.S. government\u2019s finances. And the markets, efficient as they are, largely react only to new information.<\/p>\n

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You\u2019ll therefore be hard pressed to find any price movement that you can confidently attribute to the downgrade. That hasn\u2019t stopped analysts from searching the historical record for what happened following past downgrades or threatened downgrades, hoping to make predictions about how the markets will react this time around. They are searching in vain.<\/p>\n

The hallmark of market efficiency is that any price action subsequent to an already discounted event will be random. Take the 10-year Treasury yield
\n BX:TMUBMUSD10Y,<\/span>
\n which you might expect to jump following a downgrade. In the immediate wake of the August 2011 U.S. government debt downgrade, for instance, the 10-year yield fell. This time around it rose. Go figure.<\/p>\n

Or take gold
\n GC00,
\n +0.11%<\/bg-quote>,<\/span>
\n the geopolitical hedge you\u2019d expect to rise in the wake of a U.S. government debt-rating downgrade. That is what happened immediately after the August 2011 downgrade. But this time, gold prices fell.<\/p>\n

You might object that Fitch\u2019s downgrade was genuinely unexpected and therefore is new information that should cause the markets to move. Except what\u2019s important for the markets is not Fitch\u2019s rating per se but the reasons the agency gave for its downgrade. And everyone already knew that those reasons were entirely true. There was nothing new for the markets to react to.<\/p>\n

To quote directly from the Fitch report, U.S. government debt was downgraded because of:<\/p>\n