A Bolt From The Blue: Treasury Yields Go Haywire; Fitch Retains Negative Watch Despite US Debt Ceiling Resolution

Despite the resolution of the debt ceiling standoff allowing the U.S. government to meet its obligations, Fitch Ratings has chosen to maintain its "Rating Watch Negative" stance on the U.S. rating, according to a statement released by the credit rating agency on Friday.

The suspension of the debt limit is consistent with Fitch's expectations and the 'AAA' sovereign rating of the United States. However, Fitch is concerned about repeated political standoffs and last-minute resolutions that have undermined confidence in fiscal and debt responsibility.

Governance Shortcomings Pose Risks To U.S. Economic And Financial Strengths

Despite the U.S. dollar's dominant status as a reserve currency, a vibrant economic climate, and high GDP per capita, Fitch believes that these advantages may be progressively undermined by governance flaws. 

Fitch voiced concern about rising deficits and debt due to "repeated brinkmanship over the debt limit" and growing mandatory spending. 

Fitch To Evaluate U.S. Rating In Third Quarter Based On Policy Coherence And Credibility

Fitch intends to resolve the Negative Watch on the United States 'AAA' rating in the third quarter, taking into consideration "the coherence and credibility of policymaking" and "medium-term fiscal and debt trajectories."

Treasury Yields Spike As Debt Ceiling Saga Ends, Fitch Keeps Rating Watch Negative

President Joe Biden is set to sign the bill approved by the U.S. Congress on Friday, bringing the debt ceiling saga to a close. He will deliver a prime-time televised address from behind the Resolute desk in the Oval Office at 7 p.m. ET. Meanwhile, U.S. Treasury bonds experienced severe losses, coupled with remarkable yield surges across all categories on Friday.

• The yield on the two-year Treasury bond skyrocketed 18 basis points (bps) in a day to 4.52%.
• Yields on the five-year Treasury bond surged 15bps to 3.85%.
• Yields on the 10-year Treasury bond rose 10bps to 3.70%.
• Yields on the 30-year Treasury bond went up by 7bps to 3.88%.
• The iShares U.S. Treasury Bond ETF GOVT lost 0.6%. 
• The iShares 20+ Year Treasury Bond ETF TLT tumbled by 1.1% on the day, marking its worst session since May 8.
• The iShares 1-3 Year Treasury Bond ETF SHY fell 0.3%.

Chart: U.S. Treasuries Fell After Congress Passed Debt Ceiling Deal

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