US set to borrow more despite credit rating downgrade by Fitch

The US Department of Treasury on Wednesday announced an increase in the issuance of longer-term bonds in the coming months, reflecting the growing borrowing needs of the US government while the federal debt keeps expanding.

The Treasury is offering $103 billion of securities to refund $84 billion of privately held Treasury bonds maturing on August 15, 2023, according to a department notice.

The increased issuance translates to a rapid surge in federal debt levels, which partially prompted Fitch Ratings to downgrade the US government's credit rating from AAA to AA+on Tuesday.

The downgrade reflects the expected fiscal deterioration over the next three years and a high and growing general government debt burden, the agency said in a statement.

Market observers and experts warned that the lowered rating and increase in bond issuance would add fuel to a possible sell-off in Treasury bonds.

"With larger auctions confirmed for the coming quarter, the sell-off has extended," BMO Capital Markets strategist Benjamin Jeffery said in a note, Bloomberg reported.

Fitch's downgrade will have a negative impact on investors' willingness to hold US Treasury bonds, exacerbating concerns about the country's ability to repay its debts, Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times on Thursday.

Concerns about the ever-growing US debt and another downgrade in the country's credit ratings will cause investors to dump their holdings of US bonds, Xi said.

According to data from the US Treasury Department, the US government's fiscal deficit for the first nine months of this fiscal year accumulated to $1.4 trillion - nearly triple the year-earlier level. The US public debt has exceeded $32.6 trillion, which equates to nearly $100,000 of debt per American citizen.

And, all four of the largest holders of US debt cut their holdings in May.

The Chinese mainland's holdings fell for a third consecutive month to $846.7 billion, nearly a 13-year low, according to data released by the US Treasury Department. Japan, though still the largest holder, saw its holdings drop $123.1 billion year-on-year to $1.0968 trillion.

Despite the June bipartisan agreement to suspend the US debt limit until January 2025, the frequent political standoffs and last-minute resolutions regarding the debt limit have undermined trust in fiscal management, according to Fitch Ratings.

Experts anticipate that the US debt crisis may worsen in the coming years, exerting a long-term impact on the US economy, which may lead more international agencies to lower ratings on the US.

"The US debt crisis is causing interest rates to rise, which will increase the financing costs for businesses. This will have a negative impact on investment and consumption," Xi said.

Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at the Renmin University of China, told the Global Times on Thursday that Fitch's downgrade of US credit rating is justified, although it may have come a bit late.

Dong said that the US' misuse of its dollar hegemony and the Fed's outsize quantitative easing followed by a sudden increase in interest rates to boost the return on the US dollar has had detrimental effect on developing countries, exacerbating their debt burdens.

"It is expected that Moody's could follow suit in downgrading the US credit ratings," Dong said.

Tighter credit conditions, weakening business investment and a slowdown in consumption will push the US economy into a mild recession in the fourth quarter of 2023 and the first quarter of 2024, according to Fitch projections.

The agency sees US annual real GDP growth slowing to 1.2 percent this year from 2.1 percent in 2022 and overall growth of just 0.5 percent in 2024.