Analysis: Rating Agency Scrutiny Raises Stakes For U.S. Election Process

Relegating the United States to a lower-tier credit rating or adding a negative outlook might not be an immediate blow to the value of U.S. Treasury debt, investors said.

Justin Hoogendoorn, head of fixed income strategy for Piper Sandler, said that a downgrade would likely have little impact at least in the short run on investors’ perception of Treasuries as a safety play.

When S&P lowered its long-term U.S. rating by one notch in 2011 over a widening deficit and higher debt levels, Treasuries rallied as investors bought them as safe-haven assets.

Should Moody’s, Fitch or both join S&P in a downgrade of the U.S. rating, it would effectively mark the end of the country’s long run as a triple-A credit, and while Treasury prices themselves may hold up, it could roil riskier assets as occurred in August 2011.

The long-running tensions of that time, including a congressional fight over the debt ceiling, damaged the perceived safety of U.S. bonds. The credit-default swap on the benchmark 10-year Treasury note, which measures the cost to insure U.S. government debt, in August 2011 had roughly doubled from a year prior.

Other countries have seen sanguine reactions. Late on Friday, Moody’s lowered the United Kingdom’s sovereign debt rating to Aa3 from Aa2, yet the yield on the benchmark 10-year gilt ended Monday lower at 0.171%.

“We don’t think delayed election results will cast any doubts on the viability of the largest sovereign bond market in the world,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.

One reason to expect tame bond behavior is an expectation that the U.S. Federal Reserve would step in to suppress volatility.

“In a nutshell, the Fed will again be called on by the markets,” said Omar Slim, fixed income portfolio manager, PineBridge Investments in Singapore.

Investors with doubts about the viability of U.S. assets have some alternatives in sovereign debt in other countries, such as Switzerland and Japan, said Erik Weisman, a portfolio manager at MFS Investment Management in Boston. Weisman said MFS has held internal conversations examining which countries’ debt would be an attractive safe haven.

“If you’re not feeling supremely confident that the legal system will back your claims for assets, and for Treasuries specifically, then maybe you won’t see the U.S. as the safest destination,” Weisman said.

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