A report by the National Association of State Budget Officers in 2021 noted that this is partly because all states (including Washington D.C.) require balanced operating budgets in some form except for one state.
JPMorgan analysts suggested last Friday that states should remain relatively unaffected by this downgrade. They referenced a 2023 report from Moody’s which adjusted its outlook for the U.S. government to negative at that time but noted few public finance issuers were directly impacted by this change.
However, for the federal government it’s a different story altogether. When Moody’s downgraded its rating for the U.S. government to Aa1 last Friday they stated policymakers had “failed to implement measures reversing trends of massive annual fiscal deficits and rising interest costs.”
This downgrade highlights growing concerns that ballooning debt and deficits could damage America’s status as a preferred global capital destination while increasing borrowing costs for Washington D.C.. These worries quickly showed up in market reactions last Friday: yields on 10-year Treasury bonds surged while exchange-traded funds tracking S&P 500 fell sharply.
Other parts of financial markets including roughly $9 trillion worth US-government-backed mortgage bonds might see bigger swings come Monday since they’re more sensitive towards interest rate changes.. Although only few companies like Johnson & Johnson or Microsoft have AAA credit ratings according S&P Global Ratings corporate borrowing costs may rise because their premiums usually benchmark against Treasury yields
Nevertheless history suggests US states demonstrate considerable resilience even when Fitch downgraded America’s rating AA+ back during year-2023 those rated AAA still kept their top-notch status.. Back then Florida Governor Ron DeSantis called his state blueprint what federal authorities ought follow
Yet certain segments within municipal bond market might feel pinch similar how it happened post-Fitch downgrade.. For instance billions dollars’ worth municipals tied America’s rating got knocked down too such pre-refunded ones relying solely upon US-government-agency-debt held escrow accounts
JPMorgan analysts again cited Moody’s year-2023 report indicating credits like Washington D.C.’s some housing deals indeed link up directly with Uncle Sam’s creditworthiness
After adjusting its year-2023 assessment Moody’s also shifted Smithsonian Institution’s Aaa outlook stable-to-negative reflecting significant funding governance ties between both entities
Rising Treasury yields could impact municipal-bond-markets businesses nationwide differently too since local-state debts often take cues off Treasuries
When Fitch cut America’s score they also slashed municipals backed-by-mortgage-securities mainly issued via Ginnie Mae Fannie Mae Freddie Mac.. As rates fluctuate prices these securities drop further swings would worsen recent tariff-induced volatility hurting bonds badly already
Neil Aggarwal portfolio manager Reams Asset Management said “Volatility stays elevated especially long-term rates hit relatively-high levels recently so fixed-income investors already worry about growth liquidity”
Post-Fitch-2023-downgrade volatility rose harming returns relative Treasuries but Aggarwal mentioned overall impact mortgage-securities might stay limited unless larger-unexpected downgrades happen since major holders aren’t too sensitive towards such shifts
Ken Shinoda portfolio manager DoubleLine Capital noted “Given half-step downgrade plus other agencies acted first direct-impact smaller compared rate-fluctuations”
Following Fitch-lowered-score they also cut Fannie Mae Freddie Mac still under governmental conservatorship post-2008-crisis leading over four-hundred-related-securities’ scores getting lowered
admin