Global stock markets suffered a heavy sell-off on Wednesday after Fitch Ratings unexpectedly downgraded Washington’s top-tier sovereign debt rating, while US Treasuries largely shrugged off the decision.

Wall Street’s benchmark S&P 500 declined 1.2 per cent, on track for its biggest daily drop in over three months, while the tech-focused Nasdaq Composite gave up 1.9 per cent.

The moves came after Fitch cut the US credit rating from triple A to double A plus after markets closed on Tuesday, citing a mounting government debt burden and the debt ceiling stand-off two months ago that brought the world’s largest economy close to a default.

The Wall Street sell-off echoed Europe, where the Stoxx Europe 600 index closed 1.5 per cent lower, while France’s Cac 40 gave up 1.3 per cent and Germany’s Dax lost 1.4 per cent.

London’s FTSE 100 was down 1.5 per cent, a day before the Bank of England is expected to increase its benchmark bank rate to 5.25 per cent.

In Asia, China’s benchmark CSI 300 index lost 0.7 per cent, while Hong Kong’s Hang Seng index dropped 2.5 per cent, and Japan’s Topix shed 1.5 per cent.

Karim Chedid, head of investment strategy for BlackRock’s iShares arm in Europe, the Middle East and Africa, said the downgrade had added to the recent pressure on stocks.

“We already had a soft tone in equities yesterday afternoon, prior to the downgrade, which was anchored in some of the weakness in earnings releases” as well as the latest economic data, he said.

A day earlier, fresh data showed that US manufacturing sector activity contracted for the ninth consecutive month in July, as companies cut jobs in the face of weak demand. A separate report showed that demand for US workers reached a two-year low in June.

Ten-year Treasury yields added 0.07 percentage points to 4.12 per cent, reaching their highest level in nine months after the US government announced plans to boost its issuance of long-term debt this quarter. The rise in yields reversed an earlier Treasury rally, which came as markets shrugged off concerns over the US credit rating downgrade.

Investors said the muted reaction of Treasuries reflected the fact that funds were unlikely to be forced to sell US debt as a result of the downgrade. Meanwhile, Fitch’s announcement helped fuel a global equity sell-off.

“We think the latest downgrade does not reflect any new fiscal information and should only have a limited market impact,” said Mark Haefele, chief investment officer of UBS Global Wealth Management.

“Many major Treasury holders, such as funds and index trackers, will likely have already prepared for the move to avoid having to force-sell their existing holdings. Safe-haven demand amid the downgrade jitters could also counter-intuitively support Treasuries in the short term.”

Analysts at Goldman Sachs said the Fitch move would not lead to widespread forced selling of US government debt by investors mandated to hold triple A assets. “Treasury securities are such an important asset class, most investment mandates and regulatory regimes refer to them specifically, rather than AAA-rated government debt,” they said.

Treasury secretary Janet Yellen issued a statement saying the rating downgrade did “not change what Americans, investors and people all around the world already know: that Treasury securities remain the world’s pre-eminent safe and liquid asset”.

The US narrowly avoided a government default in June, with the federal borrowing limit lifted at the eleventh hour following months of tensions over spending cuts.

Fitch is one of three rating agencies whose decisions are closely followed by market participants around the world. Moody’s maintains its triple A rating for the US, while S&P lowered its rating to double A plus in 2011 after a debt ceiling crisis that year.

“The S&P downgrade of 2011 can probably serve as a playbook here and in that situation the downgrade did not generate any material sell-off in Treasuries,” said Harry Richards, fixed-income investment manager at Jupiter Asset Management.

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