What happens because of this new downgrade? We do feel the markets will react less than they did 12 years ago, in part because subsequent events usually produce more muted results than original ones (think about the banking crisis of March). And even though these downgrades were 12 years apart, we think that still holds true.

We still have dysfunctional government and will probably have it for a while until the pendulum swings back to more cooperation between parties. And we do have plenty of issues in front of us. Most immediately, for the U.S. Treasury, is a lot of upcoming issuance, the majority of which is refinancing of debt rolling over, but there will be some new money debt as well.

There is no question that markets have increased perceived risk through credit default swaps on U.S. debt. But even after retreating, credit default swaps are still twice as high as they were at the end of 2021. This is a caution sign. My colleague David Kotok wrote about this last week: cumber.com/market-commentary/cost-debt-ceiling-crisis.

In other words, the Fitch downgrade maybe harbors a refocus on the continued deficits as well as the fiscal policy producing them. As of Aug. 4, the 10-year U.S. Treasury bond is up 14 basis points in yield and the 5-year bond is unchanged. But the roller-coaster week in yields certainly reinforced the dysfunction in our government.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.