Only 6% of Global Sovereign Debt is AAA Rated Now

Following Fitch’s historic downgrade of US government debt in August, only 6% of the total sovereign debt outstanding still holds the top rating of AAA. As a result, the value of junk-rated bonds has exceeded those with the highest rating for the first time, a historic first for the bond market.

Just $5 Trillion of Government Debt is Still Top-Rated

For the first time, the worth of junk-rated government debt now exceeds top-rated bonds – a shift prompted by Fitch Ratings’ downgrade of the $33 trillion US debt to AA+ from AAA. 

Because of it, only $5 trillion of government debt still holds the top rating, making it a smaller group than debt with a sub-investment grade, Fitch said in a Tuesday statement. This means that the portion of top-rated government bonds has declined to only 6% of the total debt outstanding, down from more than 40%.  

“‘AAA’ had previously always been the largest sovereign rating category, measured by outstanding debt, notwithstanding the fall in the number of ‘AAA’ rated sovereigns since the eurozone crisis.”

– Fitch Ratings said in a Tuesday statement.

Germany, Singapore, Switzerland, and Australia are also countries with top-rated government bonds at Fitch. 

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Why are Bond Credit Ratings Important?

Sovereign credit ratings are assessments provided by rating agencies like Fitch, Moody’s, and S&P that evaluate a country’s creditworthiness. These ratings are essential for international investors, governments, and financial institutions as they offer insights into a nation’s ability to meet debt obligations. 

Agencies offering bond ratings base their evaluations on economic stability, political risk, fiscal policies, and debt levels. Significant upgrades or downgrades by Fitch and other rating agencies are closely watched because they signal shifts in a country’s financial health and can affect its access to global capital markets.

In early August, Fitch reduced the US long-term foreign-currency issuer default rating from AAA to AA+, citing “expected fiscal deterioration over the next three years,” an erosion of governance, and a mounting general debt burden.

Although it was seen as a historic move, Fitch’s downgrade of the US credit rating is unlikely to impact the economy substantially. First of all, the demotion was not a huge drop. Even at AA+, the US is still seen as highly creditworthy.

Additionally, the issues cited by Fitch were not news. It has been known for a while that the US debt is on an unsustainable trajectory, and the country’s lawmakers struck a deal to raise the debt ceiling and reduce deficits by $1.5 trillion two months before Fitch’s downgrade. For that reason, the move has been largely dismissed by economists and analysts. 

Do you think implications could worsen if other major agencies follow suit and downgrade the US credit rating? Let us know in the comments below.