Sovereign Credit Ratings for the United States

The United States no longer holds the top credit rating from all major agencies. S&P downgraded the US from AAA to AA+ in 2011; Fitch followed in 2023. Moody's maintains Aaa but with a negative outlook. Despite these downgrades, Treasury yields showed no lasting increase—raising questions about what sovereign ratings actually signal and whether they matter for investors.

Current US Ratings

What AA+ means: Second-highest rating tier. Indicates "very strong capacity to meet financial commitments" but slightly more susceptible to adverse conditions than AAA.

What the ratings do not mean: They do not indicate any meaningful default risk for a country that borrows in its own freely floating currency.

The 2011 S&P Downgrade

What Happened

On August 5, 2011, S&P lowered the US rating from AAA to AA+, citing:

1. Debt ceiling brinksmanship: Congress came within days of potential default during the 2011 debt ceiling standoff.

2. Fiscal trajectory: Rising debt-to-GDP ratios and insufficient deficit reduction plans.

3. Political dysfunction: Inability of political system to address long-term fiscal challenges.

Market Reaction

Contrary to expectations, Treasury yields fell after the downgrade:

• 10-year Treasury yield: 2.56% on August 5 → 2.11% on August 10
• Flight to quality amid European debt crisis and US economic weakness

Key insight: The downgrade didn't reflect new information about US creditworthiness—markets had already priced in fiscal concerns through the debt ceiling crisis.

The 2023 Fitch Downgrade

What Happened

On August 1, 2023, Fitch lowered the US rating from AAA to AA+, citing:

1. Repeated debt ceiling standoffs: The 2023 crisis came within days of X-date.

2. Fiscal deterioration: Deficits running 6%+ of GDP at near-full employment.

3. Governance erosion: "Steady deterioration in standards of governance over the last 20 years."

Market Reaction

Again, muted:

• 10-year Treasury yield: Rose modestly from 4.03% to 4.18% over following week
• Effect was difficult to separate from other factors (BOJ policy shift, strong data)
• No forced selling or liquidity disruption

Why Ratings Matter Less for the US

Reserve Currency Status

The US dollar is the world's primary reserve currency:

• ~60% of global foreign exchange reserves held in dollars
• Treasury securities are the dominant safe asset globally
• No alternative exists at comparable scale and liquidity

Implication: Even with a downgrade, demand for Treasuries remains structurally strong because there's nowhere else to go for risk-free dollar-denominated assets.

Borrowing in Own Currency

The US borrows in dollars, which it can create:

• No foreign currency mismatch risk
• Technical default is a political choice, not an economic constraint
• Inflation risk exists, but solvency risk does not

Key distinction: Countries like Argentina or Greece faced genuine solvency risk because they couldn't print euros or dollars. The US faces no such constraint.

Market Size and Liquidity

The Treasury market is the largest and most liquid bond market globally:

• ~$27 trillion in publicly held debt
• Average daily trading volume: ~$700 billion
• Deep derivative markets (futures, options, swaps)

Implication: Institutional mandates requiring "investment grade" or "AAA" holdings typically treat US Treasuries as special cases regardless of rating.

What Ratings Do Signal

Governance and Political Risk

Rating agencies increasingly emphasize political factors:

• Debt ceiling dysfunction
• Inability to address structural deficits
• Polarization affecting fiscal policymaking

These concerns are legitimate—but they're about political risk, not credit risk in the traditional sense.

Relative Fiscal Position

Downgrades signal that the US fiscal position has deteriorated relative to:

• Other AAA-rated countries (Germany, Australia, Switzerland)
• The US's own historical fiscal trajectory

Long-Term Trajectory Concerns

Rating agencies highlight:

• Rising interest costs as share of budget
• Entitlement spending growth
• Structural deficits even at full employment

These trends are real, even if default risk is negligible.

Rating Agency Methodology

Key Factors Assessed

Limitations of Sovereign Ratings

Track record: Rating agencies failed to predict most sovereign crises (Asian financial crisis, Argentina 2001, Greece 2010).

Lagging indicators: Ratings typically change after markets have already moved.

Judgment calls: Political assessments are inherently subjective.

Investor Implications

What to Monitor

Debt ceiling dynamics:

• Ratings are most likely to change around debt ceiling crises
• Monitor Congressional calendar and X-date estimates

Fiscal trajectory:

• Watch CBO projections for debt-to-GDP trends
• Track interest costs as share of revenues

Political developments:

• Bipartisan fiscal reform efforts (rare)
• Further governance deterioration

Portfolio Considerations

Short-term: Rating changes have minimal direct portfolio impact. No forced selling occurs because Treasuries are treated as special asset class.

Long-term: Sustained fiscal deterioration could eventually manifest in:

• Higher term premium (investors demanding more yield for duration risk)
• Weaker dollar
• Inflation expectations

Checklist for Rating Events

When a rating action occurs:

• Read the full press release for specific concerns
• Note whether outlook is stable, positive, or negative
• Assess whether markets have already moved
• Check for any policy response from Treasury or Congress
• Monitor Treasury auction results in following weeks

Common Pitfalls

Pitfall 1: Expecting immediate yield spikes

Both 2011 and 2023 downgrades produced minimal lasting yield increases. Treating sovereign downgrades like corporate downgrades leads to incorrect expectations.

Pitfall 2: Conflating rating with default risk

US Treasuries carry effectively zero default risk regardless of rating. The rating reflects fiscal trajectory and governance, not solvency.

Pitfall 3: Ignoring the asymmetry

A US upgrade back to AAA would require sustained fiscal improvement. A further downgrade would require materially worse conditions than already exist. The rating is sticky.

Pitfall 4: Overweighting rating agency credibility

The same agencies rated subprime mortgage bonds AAA before 2008. Their sovereign analysis deserves appropriate skepticism.

Summary

US sovereign ratings have declined from AAA at two of three major agencies, primarily due to political dysfunction around debt ceilings and deteriorating fiscal trajectory. Market impact has been limited because the US retains reserve currency status, borrows in its own currency, and offers unmatched market liquidity. Ratings signal governance and fiscal concerns worth monitoring, but they don't indicate meaningful default risk. Investors should treat rating changes as one data point among many, not as triggers for portfolio action.

Related Articles

• Debt Ceiling Mechanics and Contingency Plans
• Budget Deficits, Surpluses, and Debt-to-GDP
• Treasury Issuance Schedules and Auctions

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References

S&P Global Ratings (2011). United States of America Long-Term Rating Lowered.

Fitch Ratings (2023). Fitch Downgrades the United States' Long-Term Ratings to 'AA+'.

Moody's Investors Service (2023). Moody's changes outlook on United States' Aaa ratings to negative.