CIO Notebook : Thoughts on the Fitch Downgrade

August 02, 2023

We anticipate little disruption in the current trends and believe that it would not be prudent to make investment changes based on it.

Yesterday’s downgrade by Fitch Ratings of U.S long-term debt from AAA to AA+ took many investors by surprise given the resolution of the debt ceiling crisis in late May and early June. However, the fiscal challenges created by Covid-19 stimulus and the partisanship during the debt ceiling negotiations are well documented, so the underlying rationale for the downgrade by Fitch is understandable. That being said, the basis for their timing is more unclear in our view.

There has been little progress towards curbing federal spending to shrink the U.S. budget following that stimulus. For reference, the U.S. is running annual budget deficits of ~5 to 6% of GDP and total debt held by the public represents ~98 to 100% of overall GDP per the Congressional Budget Office (CBO). The last major change to tax policy was the Tax Cuts & Jobs Act in 2017, which decreased tax revenues with no meaningful offset in spending. If one considers the situation going back to the GFC, it would appear to point to an earlier downgrade – such as the one effected by S&P in 2011.

In evaluating the market response to the announcement, it is really more about the timing than anything else – Fitch has not taken any action on the debt amidst deteriorating governance and a burgeoning deficit, so why now? In our view, it lacks timeliness and is inconsistent. In particular, their citing of partisanship is nothing new and is a difficult catalyst for us to understand.

We believe the important issue here centers around how this will impact investor demand for Treasuries. One could argue that it perhaps sets a higher floor for rates. However, given the diversity of the U.S. economy, the large tax base, the functional role of the U.S. dollar in the global economy, and the historical precedent of safe haven flight to Treasuries during geopolitical and economic crises, we expect this downgrade to do little to decrease demand in the near to mid-term. The S&P downgrade in 2011 was a seismic event, and in contrast, this Fitch move seems more like a tremor. Longer term, however, the question of fiscal responsibility in Washington D.C. is likely to become more relevant to investors, especially given its status as a hot button political issue coming into a presidential election year.

Outside of Treasuries, we anticipate little disruption in the current trends and believe that it would not be prudent to make investment changes based on it.


This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. Diversification does not guarantee profit or protect against loss in declining markets. Investing entails risks, including possible loss of principal. Investments in private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in private equity are intended for sophisticated investors only. Unless otherwise indicated, returns shown reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Portfolio positioning views expressed herein are those of Neuberger Berman’s Investment Strategy Group (ISG), which may include those of the Neuberger Berman’s Asset Allocation Committee. Asset allocation and positioning views are based on a hypothetical reference portfolio. ISG analyzes market and economic indicators to develop asset allocation strategies. ISG works in partnership with the Office of the CIO. ISG also consults regularly with portfolio managers and investment officers across the firm. The Asset Allocation Committee is comprised of professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates. Asset Allocation Committee members are polled on asset classes and the positional views are representative of an Asset Allocation Committee consensus. The views of the Asset Allocation Committee and ISG may not reflect the views of the firm as a whole and Neuberger Berman advisers and portfolio managers may take contrary positions to the views of the Asset Allocation Committee or ISG. The Asset Allocation Committee and ISG views do not constitute a prediction or projection of future events or future market behavior. Defensive positioning generally means an underweight bias on allocations to risk assets such as equities and alternatives. Positioning views may change over time without notice and actual client positioning may vary significantly. Discussion of yield characteristics or total returns of different asset classes are for illustrative purposes only. Such asset classes, such as equities and fixed income, may have significantly different overall risk-return characteristics which should be consider before investing.

The information in this material may contain projections, market outlooks or other forward-looking statements regarding future events, including economic, asset class and market outlooks or expectations, and is only current as of the date indicated. There is no assurance that such events, outlook and expectations will be achieved, and actual results may be significantly different than that shown here. The duration and characteristics of past market/economic cycles and market behavior, including any bull/bear markets, is no indication of the duration and characteristics of any current or future be market/economic cycles or behavior. Information on historical observations about asset or sub-asset classes is not intended to represent or predict future events. Historical trends do not imply, forecast or guarantee future results. Information is based on current views and market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Discussions of any specific sectors and companies are for informational purposes only. This material is not intended as a formal research report and should not be relied upon as a basis for making an investment decision. The firm, its employees and advisory accounts may hold positions of any companies discussed. Nothing herein constitutes a recommendation to buy, sell or hold a security. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. Investment decisions and the appropriateness of this content should be made based on an investor's individual objectives and circumstances and in consultation with his or her advisors.

Neuberger Berman Investment Advisers LLC is a registered investment adviser.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC

© 2023 Neuberger Berman Group LLC. All rights reserved.