Analysis: Rating agency scrutiny raises stakes for U.S. election process

Analysis: Rating agency scrutiny raises stakes for U.S. election process

Reuters  | Oct 21, 2020 06:11

Analysis: Rating agency scrutiny raises stakes for U.S. election process

By Ross Kerber and Kate Duguid

BOSTON/NEW YORK (Reuters) - As Americans go to the polls, some of the more influential observers of the election process will be the agencies that determine the country's credit rating.

The country's nearly top-notch, coveted rating is partly a reflection of the dollar's status as the world's reserve currency and the fact that the roughly $20 trillion U.S. Treasury market is the largest and most liquid in the world.

Yet two of the three major U.S. credit agencies, Fitch Ratings and Moody's Investors Service, which give the United States their top rating of AAA and Aaa respectively, are watching the election and have said that anything other than a smooth handover or retention of power could cause concern.

The third major agency, Standard & Poor's, rates the country's long-term debt at AA+, just below the highest grade, partly on fiscal concerns. S&P has also cited political disagreements as a constraint on its ratings.

"If we don't have a clear election result after election day we're going to watch the process very closely," said William Foster, Moody's senior credit officer.

Fitch analyst Charles Seville said in a recent report https://www.fitchratings.com/research/sovereigns/drawn-out-us-presidential-election-scenario-highlights-governance-risks-12-10-2020 that the agency will also monitor the election for usual scenarios amid the rise of mail-in voting and logistical challenges at polling places. He wrote the current high grade is contingent on processes "for the transfer of power that are broadly accepted and executed."

Asked about potential election uncertainty this year, a spokesman for S&P said its current thinking was reflected in its April 2 report, which cites partisanship as a rating constraint.

The focus on the process of the Nov. 3 national and state elections comes as U.S. President Donald Trump has offered a mixed message on whether he would cede power if he loses. 

So far the agencies have maintained their U.S. ratings despite the economic devastation and fiscal stress caused by the COVID-19 pandemic.

LITTLE SHORT-TERM IMPACT

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 (GB10YT=RR) 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 (DE:ALVG) 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.

© Reuters. FILE PHOTO: U.S. dollars are counted out by a banker at a bank in Westminster

"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.     

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Discussion
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (India) English (Canada) English (Australia) English (South Africa) English (Philippines) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Polski Português (Portugal) Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
NoYes
CancelYes
Saving Changes

+

Download the Investing.com App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.

Investing.com is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.

';