The Zhitong Finance App learned that CITIC Securities released a research report stating that the recent downgrade in US debt ratings and increased issuance have once again attracted market attention to the US debt issue. As far as the rating downgrade is concerned, the biggest difference between the current US bond rating downgrade and 2011 is that the timing of the downgrade and market focus are different; in terms of increased issuance, the core of the US Treasury's refinancing statement in the third quarter was to increase the issuance scale of interest-bearing treasury bonds to meet medium- to long-term financing needs. As far as the effects of the two are concerned, CITIC Securities believes that the short-term impact of the downgrade in US bond ratings and increased issuance on the market is concentrated on signaling effects and sentiment. The long term may lead to an increase in future US debt financing costs, and a further increase in the US fiscal burden. It is expected that interest rates on 10-year US Treasury bonds will still fluctuate around a high of 4% in the short term. Whether they can reach a new high still needs to be paid attention to the monetary policy of the European and Japanese central banks. The current downgrade in US bond ratings and the increase in US bond issuance are not decisive factors in US bond interest rates before breaking through the high before they broke through.
The biggest difference between the current downgrade of US debt ratings and 2011 is that the timing of the downgrade and the focus of market attention are different.
Recently, Fitch announced that it will downgrade the US Long-Term Foreign Currency Issuer Default Rating (IDR) from “AAA” to “AA+.” The most recent downgrade in the US debt rating occurred in August 2011. At that time, the incident triggered turmoil in the global market, and the market was worried about whether the current downgrade in ratings would have an impact similar to that of 2011. The difference between the current US debt rating downgrade and 2011 is: first, almost 3 months have passed since the period with the greatest risk of the US debt ceiling rating, while the time when S&P downgraded the US debt rating in 2011 was only 3 days until the US Congress raised the debt ceiling; secondly, the current market focus is not on the US debt default issue, and the market's focus was still on the US debt default issue when the US debt rating was downgraded in 2011.
On August 2, the US Treasury issued a quarterly refinancing statement. The core of the statement was to increase the issuance scale of interest-bearing treasury bonds to meet medium- to long-term financing needs.
According to the third-quarter refinancing statement issued by the US Treasury Department, the Treasury plans to gradually increase the auction scale of interest-bearing treasury bonds from August to October 2023, while the auction scale may be further increased in the next few quarters. Another reason why this increase in the issuance of interest-bearing treasury bonds has attracted market attention is that the last time the US Treasury announced plans to issue additional interest-bearing treasury bonds was in the fourth quarter of 2020, and there have been no plans to increase the issuance scale for 2 and a half years. Furthermore, the US Treasury expects financing demand to remain as high as 1859 billion US dollars for the rest of the year, which also raises concerns in the market about the increase in the supply of US debt.
In the short term, the impact of the downgrade of US debt ratings and increased issuance on the market is concentrated on signaling effects and sentiment, and is not very sustainable.
Looking at the short-term impact, a series of substantial changes resulting from the downgrade of US debt ratings are difficult to quickly transfer to the real economy and capital markets in the short term, so the impact of the downgrade of US debt ratings on the market is mainly reflected in risk aversion in the short term; while the scale of issuances of interest-bearing US bonds and the increase in total demand for financial financing in the short term mainly heightens market concerns about the future surge in the supply of medium- and long-term US bonds.
In terms of sustainability, the core concerns of the current market are still whether the US economy is in recession, whether financial risks have erupted, and whether the Fed continues to raise interest rates. The downgrade in US debt ratings will not cause market concerns about US debt default issues to continue to increase; however, the increase in the scale of US Treasury financing is expected to mainly come from short-term bond issuance, and the impact of long-term interest rates due to increased issuance in the short term may not be significant.
In the medium to long term, the downgrade of US bond ratings and increased issuance may lead to an increase in future US debt financing costs, and the US fiscal burden will further increase.
First, theoretically speaking, the downgrade of US debt ratings may raise the cost of US debt financing in the longer term and further increase the US fiscal burden. At the same time, it may also be transmitted to other sectors of the US economy, raising financing costs for other sectors, but in reality, we still need to continue to observe the longer-term effects. Second, interest rates on long-term US bonds may support interest rates on US bonds at a time when the scale of US bond issuance continues to increase significantly. It is necessary to consider the specific pace of the increase in the issuance of long-term US bonds and the demand for US bonds affected by monetary policy and economic fundamentals at that time.
It is expected that interest rates on 10-year US Treasury bonds will still fluctuate around a high of 4% in the short term; whether they can reach a new high still requires attention to the monetary policy of the European and Japanese central banks.
Interest rates on 10-year US Treasury bonds currently fluctuate around 4%. We think that under the circumstances where the monetary policy of the central banks of Europe and Japan does not exceed expectations, interest rates on 10-year US Treasury bonds are already at a high level in the current round of interest rate hikes. The short-term may still fluctuate around the 4% high level. Downside space may open up after US consumer demand weakens significantly in the fourth quarter of this year. If the central banks of Europe and Japan tighten monetary policy beyond expectations, there is a possibility that interest rates on US bonds will break through their previous highs. The current downgrade in US bond ratings and the increase in the scale of US bond issuance are not decisive factors for US bond interest rates to break through the previous high.
Risk Factors:
US inflation rebounded beyond expectations; the Federal Reserve raised interest rates beyond expectations; and the US job market and consumption strengthened beyond expectations.