Dow Drops 200 Points After Fitch Downgrades US Credit Rating, Treasury Boosts Bond Sales

Traders work on the floor of the New York Stock Exchange in New York City, on July 6, 2023. Brendan McDermid/Reuters

The Dow Jones Industrial Average dropped 146 points just after opening bell on Wednesday, sliding down by 233 points altogether before noon. The Wall Street dip came after credit-ratings agency Fitch rattled investors with a surprise rating downgrade on Tuesday.

By 11:30 a.m., the benchmark S&P 500 Index was down 1.17 percent, and the Nasdaq Composite was down 2 percent.

Major tech stocks led the tumble, with Tesla, Nvidia, Meta Platforms, and Apple leading the sell-off.

On Tuesday, Fitch had downgraded the Long-Term Foreign-Currency Issuer Default Rating for the country from AAA to AA+.

Richard Francis, the co-head of Americas sovereign ratings at Fitch Ratings, explained the decision on CNBC.

“A steady deterioration in key metrics we’ve seen in the U.S. for a number of years” was a key factor, he said, and Fitch forecasts that U.S. debts and deficits will only grow over the next three years.

Fitch had predicted that the general government deficit will climb to 6.3 percent of GDP in 2023, up from 3.7 percent in 2022, due to cyclically lower federal revenues, new spending initiatives, and a greater interest burden.

‘Middle Falling Apart’

An “erosion of governance” was another reason cited in Fitch’s Tuesday report.

“It was something that we highlighted because it just is a reflection of the deterioration in governance, it’s one of many,” Mr. Francis told Reuters. “You have the debt ceiling, you have January 6. Clearly, if you look at polarization with both parties ... the Democrats have gone further left and Republicans further right, so the middle is kind of falling apart basically.”

The U.S. Capitol building in Washington, on July 12, 2023. Jemal Countess/Getty Images for Get Free

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch stated.

“In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.”

“The debt ceiling itself, suspending it or getting rid of it somehow, would help,” Francis said. “The idea that the United States reaches an X-date and all of a sudden can’t pay its bills, that’s not consistent with the AAA [rating] either.”

US Treasury Boosting Bond Sales

After the downgrade, the U.S. Department of the Treasury announced it was selling $103 billion of securities to refund about $484 billion of Treasury notes and bonds.

It comes in the form of a three-year note of $42 billion, a 10-year note of $38 billion, and a 30-year bond of $23 billion to be auctioned next week.

The Treasury plans to ramp up bond sales over the next quarter to help finance the nation’s budget deficits.

Debt Ceiling

Fitch had warned the U.S. rating was in jeopardy two months ago when Congress debated raising the debt ceiling.

Government spending has increased significantly under the Biden administration, with the president touting it as a “Bidenomics” investment strategy in his campaign tour.

According to the Congressional Budget Office (CBO), the federal budget deficit was $1.2 trillion in just the first eight months of fiscal year 2023, up $735 billion—practically double—from last year.

The United States has carried debt since its inception, but the so-called debt ceiling limits the amount of allowable federal debt. The nation hit that $31.4 trillion, leading to talks to raise the debt ceiling.

Government Responds

Despite the warning, the announcement caused a stir.

“We strongly disagree with this decision,” White House press secretary Karine Jean-Pierre said in a statement, adding that the economy had declined under former president Donald Trump, but improved under President Joe Biden.

U.S. Treasury Secretary Janet Yellen speaks during a press conference at the Beijing American Center of the U.S. Embassy in Beijing, on July 9, 2023. Pedro Pardo/AFP via Getty Images

Secretary of the Treasury Janet L. Yellen wrote much the same in a statement.

“I strongly disagree with Fitch Ratings decision. The change by Fitch Ratings announced today is arbitrary and based on outdated data,“ Secretary Yellen stated. ”Many of these measures, including those related to governance, have shown improvement over the course of this administration, with the passage of bipartisan legislation to address the debt limit, invest in infrastructure, and make other investments in America’s competitiveness.”

This was the second time in history the country’s triple-A rating has been downgraded. In 2011, amid a budget battle between Republicans in Congress and the Obama administration, as well as the European debt crisis, Standard & Poor’s lowered the U.S. rating.

Some Investors Unmoved

Not all of Wall Street is reeling; some investors are brushing off the drop as a glitch.

“Fitch’s downgrade is much ado about nothing,” said Brian Jacobsen, chief economist at Annex Wealth Management, told the Associated Press.

“Yes, it’s good to call out the fiscal situation, but when a country only issues debt in its own currency, the credit rating is irrelevant. Every investment fund I’ve looked at specifies that U.S. Treasury securities are allowed investments, regardless of what a credit rating agency might think.”