Fitch Downgrades US Debt: Does It Matter?
Confidence and correlations (the glue) matter, the actual downgrade doesn’t. If the US actually defaulted, then candidly speaking, then salt would be the new money. Never say never, but the fact of Fitch downgrading US government debt is a nothing burger.
However (you knew this was coming), the question for portfolio strategy is the fact that US government debt serves multiple functions in a diversified portfolio.
Provides interest in the form of coupons paid.
Provides protection when people don’t want to invest in riskier assets.
The reality is that the first is not the question. However, if US government debt is no longer the safe haven, and further, if the US Dollar weakened dramatically as a result, the effect on your portfolio would almost certainly mean more volatility.
More volatility would likely result in lowering the risk of a portfolio, this is just common sense. People don’t like uncertainty, and those that manage money are people.
Am I Affected?
Uh, yeah. For all intents and purposes, every investor on the planet has some type of comparison or benchmark that includes US government debt. Every.
Even Jae’s Rib Shack can be affected. How? Here’s a over-simplified example.
5 yr US Treasury Note = 4.25%
Bank borrowing rate = 4.25% + X (this is why the Silicon Valley Bank / regional bank crisis matters)
Jae’s Rib Shack’s borrowing rate = Bank borrowing rate + Y, which equals 4.25 US Treasury Note + Bank borrowing rate + Y (which is now riskier, so it also goes higher). Net result = much higher, and in some cases, can’t borrow.
What Jae’s Rib Shack doesn’t want? Higher rates, and rates that are more volatile.
There is always a benchmark, a reference point for borrowing and lending. That benchmark starts with the interest rate where US government debt is, for a given maturity. From that point, the rate at which Jae’s Rib Shack can borrow begins.
Jae’s Rib Shack may have a problem that hasn’t doubled back towards lowering the demand for workers, and overall employment. Yet.