The impact on US equity markets, US Treasuries, or the US dollar will likely be minimal.
According to Vanguard, one of the world’s largest investment management companies, the recent credit downgrade of the United States is not expected to significantly impact equity markets, US Treasuries, or the US dollar.
Vanguard’s chief economist for the Americas and head of portfolio construction, Roger Aliaga-Díaz, states that while some market volatility may be expected in the short term, the downgrade’s effect will likely be minimal. Vanguard leaders believe that investors still perceive the US as having a strong willingness and ability to fulfil its obligations.
World’s reserve currency
This is not the first time the US has faced a credit downgrade. 2011 Standard & Poor’s downgraded the government’s rating from AAA to AA+, but it did not have long-lasting consequences.
After the 2011 downgrade, investors flocked to US Treasuries, pushing yields down slightly. Furthermore, there are currently few alternatives to US Treasuries as a way to invest in the world’s reserve currency, which is the US dollar.
Higher risk premiums
However, the downgrade does highlight some medium-term challenges for the US fiscal outlook. If these challenges are not addressed, investors could start demanding higher risk premiums on US Treasury borrowing costs, resulting in higher yields. Despite these potential challenges, Vanguard advises investors to stay the course and not try to time the markets.
They recommend focusing on medium- or long-term investment goals and trusting in the benefits of portfolio diversification. For those who prefer a more active approach, adding a trusted active manager to their portfolio may provide opportunities to navigate risks and find prudent investment options amid the confusion.
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To learn more about leveraging our expertise and deep understanding of global markets to navigate complex investment landscapes and seek opportunities for growth and value creation, contact GSB Capital to learn how we can help you achieve your investment goals.
 Vanguard Perspective on US Credit Downgrade
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