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ETF Areas in Focus on Fitch Downgrade of Credit Rating
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Rating agency Fitch downgraded the United States to AA+ from AAA this week, expecting fiscal deterioration over the next three years and repeated last minute debt ceiling negotiations that pressurize the government’s ability to pay its bills.
Fitch initially raised concerns about a potential downgrade in May and continued to support that stance in June after the resolution of the debt ceiling crisis. The agency, however, stated its intention to conclude the review in the third quarter of the current year, per Reuters, quoted on Yahoo Finance.
A rating downgrade indicates that the entity's creditworthiness has weakened, leading to increased risks and potentially affecting its ability to meet financial obligations. Here are some of the key impacts of a rating downgrade:
Government Bonds
A rating downgrade can have varying impacts on different investing areas and asset classes with government bonds feeling the pinch the most. A rating downgrade of a sovereign (country) can significantly hurt government bonds.
Lower credit ratings may result in a decline in the demand for government bonds, causing their prices to fall and yields to rise. Investors holding these bonds may experience capital losses, especially if they sell before maturity.
iShares 20+ Year Treasury Bond ETF (TLT - Free Report) – Down 1.9% on Aug 1
iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ - Free Report) – Down 2.51% on Aug 1
PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ - Free Report) – Down 2.5% on Aug 1
Vanguard Extended Duration Treasury ETF (EDV - Free Report) ) – Down 2.4% on Aug 1
Banks
Rating downgrades can impact the banking sector in multiple ways. Banks often hold various types of debt securities in their portfolios, and a downgrade of these securities may lead to valuation losses and reduced profitability. In any case, the U.S. banking sector is struggling under pressure due to higher rates and the holding U.S. treasuries. Invesco KBW Regional Banking ETF (KBWR - Free Report) should thus be closely followed on the event of Fitch rating downgrade.
U.S. Dollar
In the case of a sovereign rating downgrade, the currency of that country is likely to feel the pressure in the foreign exchange markets. A downgrade can result in capital outflows and a weakening of the currency against other major currencies.
Michael Schulman, chief investment officer at Running Point Capital Advisors said the "U.S. overall will be seen as strong but I think it’s a little chink in our armor," per Reuters, as quoted on Yahoo. U.S. dollar did not budge post Fitch rating downgrade. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) was up 0.5% on Aug 1.
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ETF Areas in Focus on Fitch Downgrade of Credit Rating
Rating agency Fitch downgraded the United States to AA+ from AAA this week, expecting fiscal deterioration over the next three years and repeated last minute debt ceiling negotiations that pressurize the government’s ability to pay its bills.
Fitch initially raised concerns about a potential downgrade in May and continued to support that stance in June after the resolution of the debt ceiling crisis. The agency, however, stated its intention to conclude the review in the third quarter of the current year, per Reuters, quoted on Yahoo Finance.
A rating downgrade indicates that the entity's creditworthiness has weakened, leading to increased risks and potentially affecting its ability to meet financial obligations. Here are some of the key impacts of a rating downgrade:
Government Bonds
A rating downgrade can have varying impacts on different investing areas and asset classes with government bonds feeling the pinch the most. A rating downgrade of a sovereign (country) can significantly hurt government bonds.
Lower credit ratings may result in a decline in the demand for government bonds, causing their prices to fall and yields to rise. Investors holding these bonds may experience capital losses, especially if they sell before maturity.
iShares 20+ Year Treasury Bond ETF (TLT - Free Report) – Down 1.9% on Aug 1
iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ - Free Report) – Down 2.51% on Aug 1
PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ - Free Report) – Down 2.5% on Aug 1
Vanguard Extended Duration Treasury ETF (EDV - Free Report) ) – Down 2.4% on Aug 1
Banks
Rating downgrades can impact the banking sector in multiple ways. Banks often hold various types of debt securities in their portfolios, and a downgrade of these securities may lead to valuation losses and reduced profitability. In any case, the U.S. banking sector is struggling under pressure due to higher rates and the holding U.S. treasuries. Invesco KBW Regional Banking ETF (KBWR - Free Report) should thus be closely followed on the event of Fitch rating downgrade.
U.S. Dollar
In the case of a sovereign rating downgrade, the currency of that country is likely to feel the pressure in the foreign exchange markets. A downgrade can result in capital outflows and a weakening of the currency against other major currencies.
Michael Schulman, chief investment officer at Running Point Capital Advisors said the "U.S. overall will be seen as strong but I think it’s a little chink in our armor," per Reuters, as quoted on Yahoo. U.S. dollar did not budge post Fitch rating downgrade. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) was up 0.5% on Aug 1.