Not News If It’s Not New
Markets are forward-looking, with prices quickly incorporating new and relevant information. It makes sense, then, that the US Credit Default Swap (CDS) spread, which reflects the cost to insure against a US sovereign debt default, barely budged in the days surrounding the rating agency Fitch’s downgrade1 of the US sovereign debt rating.
The US’s debt levels and upward trend were cited as factors in Fitch’s downgrade decision. However, those are known, slow-moving variables, unlikely to be news to investors, particularly with the debt ceiling debates earlier this year. If investors didn’t learn anything new, it’s unsurprising their evaluation of the country’s creditworthiness remained the same. Just like a foodie’s review is unlikely to change my opinion of a restaurant I frequent.
Source: Bloomberg.
Footnotes
- 1The news of the downgrade was circulated after US market hours on August 1.
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