On August 1, Fitch downgraded the US credit rating from AAA to AA+. MarketReader CEO and Co-Founder Jens Nordvig joined Bloomberg’s The Pulse with Francine Lacqua to talk about what this shift means for global fixed income markets, the future of central bank rates, and monetary policy.
The downgrade is due to fiscal deterioration and the continued government debt burden. In 2011, S&P was the first major rating agency to remove the United States’ triple-A rating, which offers an interesting comparison to today.
“When we analyze this type of downgrade at least from a short term perspective, we think about is there anybody who has to sell anything as a function of this change?” Jens said. “And I think in 2011, that would have been the case. There were entities that could only hold triple-A assets or they had to give triple-A assets as collateral, but that has really changed in that period since. We tried to do the numbers again last night like it’s very hard to find funds and entities that are excluded from other stuff than triple-A. So I don’t think there’s going to be a lot of foreselling, so the question is, is there going to be some sort of sentiment shift that’s going to happen as a function of that?”
Jens also offered insight into the Bank of Japan’s reaction to the change and what that means for the US bond market.
“We’ve already seen over the last 3 weeks that Japanese investors are not putting money into the US bond market anymore, and Japanese fixed income investors are very important in global fixed income markets and the US market,” Jens said. “So if they stop that because they now have higher yields domestically, that I think is an issue if the US bond market is already looking a bit shaky. So that’s something to watch very closely.”
Looking towards consumers, Francine asked what Jens is paying attention to that helps him uncover insights about income distribution.
“We have a situation now where there’s a lot of focus on AI in the market and other places. I think the concern with those accounts is that we’re going into a phase where increasingly the extra value added in the economy will be derived from some very big companies and that’s going to skew the income distribution even further and not be good for demand going forward.”
To listen to Jens’ full conversation on Bloomberg, watch the video above.