Analysis-US loss of AAA badge a reminder of 'regime shift' for government debt

investing.com:

By Yoruk Bahceli

(Reuters) — Financial markets barely flinched when Fitch stripped the United States of its top credit rating, but it served as a reminder of longer-term structural risks investors in government bonds are yet to grasp.

The immediate focus in the aftermath of the Aug. 1 downgrade has been on U.S. governance, but Fitch Ratings also flagged higher rates driving up debt service costs, an aging population and rising healthcare spending, echoing challenges that reverberate globally.

David Katimbo-Mugwanya, head of fixed income at EdenTree Investment Management, a 3.7 billion-pound ($4.71 billion)charity-owned investor, said with the move highlighting reflecting elevated debt levels at a time when interest rates will likely remain high, debt sustainability was back in focus.

«I think it really brings home that shift being a regime shift rather than a cyclical one,» Katimbo-Mugwanya said.

Pressures investors will eventually face include ageing populations, climate change and geopolitical tensions.

Such risks are making some investors, including hedge fund manager Bill Ackman, bet on rising longer-term borrowing costs. Yet many investors say factors at play are too complex and their impact too far out to influence their investment decisions.

«The rating agencies are not looking at them in a systemic way. And the investors even less,» said Moritz Kraemer, former head of sovereign ratings at S&P Global (NYSE:SPGI), now chief economist at German lender LBBW.

WARNING SIGNS

There is no shortage of research sounding alarm.

Without cuts to age-related spending, median net government debt will rise to 101% of gross domestic product in advanced and 156% in emerging economies by 2060, S&P Global Ratings said in a study