The US has lost its perfect credit rating which could trigger higher yields for Treasuries and have an impact on stocks.
Moody’s downgrade from AAA to Aa1 reflects concern about government debt and ends a 108-year perfect rating from the firm, despite previous warnings and previous downgrades from Fitch and S&P Global.
Treasury Secretary Scott Bessent dismissed the downgrade as a lagging indicator that reflects rising debt under the Biden administration.
The debt issue has been growing for some time and Moody’s warned about the situation in 2023. With a decade of rising debt, the US now has “government debt and interest payment ratios [at] levels that are significantly higher than similarly rated sovereigns.”
Although the US remains on the second of a 21-notch ratings system, Moody’s is not expecting the debt situation to be resolved in the near term: “Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat,” its statement read. “In turn, persistent, large fiscal deficits will drive the government's debt and interest burden higher. The US' fiscal performance is likely to deteriorate relative to its own past and compared to other highly rated sovereigns.”
Early Monday, US equity index futures were down around 1% and 30-year Treasuries briefly topped 5%. Global stocks dipped and gold gained as investors sought havens.
“If history is any guide, rating action impact has typically been short-lived,” said Mohit Kumar, Jefferies International chief economist and strategist. “That said, the background today is different. The tariff war has already led a number of investors to question the credibility of investing in the US and to seek alternatives.”
As a slightly less reliable borrower, the US government will likely face higher interest rates on Treasuries and that would be expected to push up other borrowing costs for households and business including mortgages, loans, and credit cards.
However, when S&P downgraded the US credit rating from AAA to AA+ in 2011 after a debt ceiling standoff the markets dropped initially, but demand for Treasuries actually increased as investors sought safety, keeping yields low.
There could be a sell-off in equities as investors seek havens and “sell America” could be a market mantra in the short term.
“Moody’s downgrade of the US isn’t a game changer for American assets. It doesn’t completely undermine US Treasuries given the depth and breadth of the market, but the underlying theme supporting diversification away from America remains intact, said Mary Nicola, Macro Strategist at Bloomberg.
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