US Credit Rating Downgrade Hits Asian Stocks... "Safe-Haven Asset Preference Boosts US Treasury Demand"

Korea, China, and Japan Stock Markets Fall Together
Increased Bond Demand Amid Risk Asset Avoidance
Surge in US Treasury Investment Demand

Global credit rating agency Fitch downgraded the United States' national credit rating for the first time in 29 years, causing major Asian stock markets to fall simultaneously. On the other hand, as the preference for safe assets strengthens, demand for U.S. Treasury investments has actually expanded despite the downgrade in the U.S. credit rating.

On the 2nd, the KOSPI index closed at 2,616.47, down 1.9% from the previous trading day. Japan's Nikkei 225 index closed at 32,707.69, down 2.3%, and the TOPIX index ended the day at 2,301.76, down 1.52%.

Chinese markets also showed a broad decline. As of 2:49 p.m. local time, the Hong Kong Hang Seng Index was down 2.4%, while the Shanghai Composite Index and the Shenzhen Composite Index fell by 0.98% and 0.42%, respectively.

Earlier, Fitch downgraded the U.S. national credit rating from 'AAA' to 'AA+' citing fiscal deterioration and increased national debt burden, spreading a preference for safe assets and increasing volatility in global stock markets. It is the first time in 12 years since Standard & Poor's (S&P) downgraded the U.S. credit rating from AAA to AA+ in 2011 that one of the three major global credit rating agencies?Fitch, S&P, and Moody's?has lowered the U.S. national credit rating. According to Fitch, this is the first downgrade of the U.S. credit rating in 29 years since August 1994. Fitch explained that in downgrading the U.S. credit rating, "Fiscal deterioration is expected over the next three years, and considering the repeated deadlocks and dramatic resolutions of the debt ceiling over the past 20 years, governance is judged to be deteriorating compared to other countries with AAA ratings."

Tony Sycamore, IG Markets analyst, said, "(The U.S. national credit rating downgrade) triggers a risk-averse flow, which means a decline in Asian stocks," adding, "Moreover, funds will flow into safe-haven currencies such as the Japanese yen and Swiss franc, and government bonds of these countries, rather than high-risk currencies like the Australian and New Zealand dollars."

In fact, as the U.S. credit rating downgrade has strengthened the global preference for safe assets, demand for U.S. Treasury investments has expanded. The yield on U.S. Treasuries is currently trading at 4.881% for the 2-year bond, down 0.63% from the previous trading day, and 4.023% for the 10-year bond, down 0.67%. As demand for U.S. Treasuries, considered the world's largest safe asset, increases, bond prices rise and yields fall.

In this context, there is growing speculation in global financial markets that a d?j? vu of August 2011, when the U.S. credit rating was downgraded, may occur. At that time, S&P downgraded the U.S. credit rating from AAA to AA+ after the U.S. Congress reached an agreement on the debt ceiling. Rather than doubting the U.S.'s debt repayment ability, the market saw an expansion in demand for U.S. Treasuries due to a preference for safe assets. According to financial information provider FactSet, the yield on the 10-year U.S. Treasury fell from about 3% in August 2011 to around 1.8% by the end of September after the downgrade. In such a situation, the stock market, considered a risk asset rather than bonds which are safe assets, is negatively affected.

The impact is expected to be greater on emerging Asian markets. In 2011, one week after S&P downgraded the U.S. credit rating, while the U.S. stock market fell by 15%, emerging Asian markets recorded even larger declines. At that time, the KOSPI index dropped by 17%. However, the shock to the stock market is also expected to be short-lived.

Amy Shea Patrick, fund manager at Australian asset management firm Pendal Group, said, "The credit rating downgrade may cause some short-term anxiety but will not have a significant impact," adding, "There is a need for sufficiently safe, large-scale, and reliable alternatives to government bonds, but currently, no clear options are visible."

This content was produced with the assistance of AI translation services.