TLDR:
- Moody’s downgraded U.S. sovereign debt from AAA to Aa1, citing increasing deficit concerns
- Treasury yields rose with the 30-year yield reaching 5%, putting pressure on markets
- Stock futures fell with Dow down 0.9%, S&P 500 down 1.3%, and Nasdaq down 1.7%
- Trump administration downplayed the downgrade, with Treasury Secretary Bessent calling it “a lagging indicator”
- Congress continues to work on tax cuts that could add trillions to the federal debt
The downgrade of the United States’ credit rating by Moody’s has sent ripples through global financial markets, with Treasury yields rising and stock futures falling as investors reassess risk in America’s fiscal outlook.
On Friday, Moody’s cut its rating on U.S. sovereign debt from AAA status to Aa1. The ratings agency warned that the U.S. was on a path to increase spending, pointing to potential extensions of President Donald Trump’s tax cuts from 2017, which could add around $4 trillion to the deficit over the next decade.
The impact was felt immediately in Monday’s premarket trading. Dow Jones Industrial Average futures dropped 367 points, or 0.9%. S&P 500 futures fell 1.3%, and Nasdaq 100 futures declined 1.7%. These movements suggest investors are concerned about what the downgrade means for the broader economy.
The bond market showed stress as well. The 10-year Treasury yield climbed to 4.52%, while the 30-year Treasury yield hit the psychologically important 5% level – reaching heights not seen since 2023.
Moody’s was the last major ratings agency to have the U.S. at the top rating. Deutsche Bank analyst Jim Reid noted, “This is a major symbolic move.” He added that there are “no signs of any serious deficit restraint” in Congress.
Market Concerns Growing
Wall Street’s worries extend beyond the immediate market reaction. The downgrade may reinforce growing concerns over the U.S. sovereign bond market as Congress debates more unfunded tax cuts while the economy appears set to slow.
Some financial experts warned of longer-term consequences. “Debt servicing costs will continue creeping higher as large investors, both sovereign and institutional, start gradually swapping Treasuries for other safe haven assets,” said Max Gokhman, deputy chief investment officer at Franklin Templeton Investment Solutions.
This shift could create what Gokhman described as “a dangerous bear steepener spiral for US yields, further downward pressure on the greenback, and reduce the attractiveness of US equities.”
The dollar has shown weakness in response to the news. A Bloomberg index of the greenback is already close to its April lows, and sentiment among options traders is the most negative in five years.
Rising Treasury yields could complicate the government’s ability to reduce the deficit by increasing interest payments. These higher rates may also weaken the economy by forcing up rates on mortgages and credit cards.
Administration Response and Future Outlook
The Trump administration has attempted to minimize concerns about the downgrade. Treasury Secretary Scott Bessent downplayed it during an interview on NBC’s Meet the Press, calling Moody’s “a lagging indicator — that’s what everyone thinks of credit agencies.”
Bessent stated that the administration is determined to lower federal spending and grow the economy. However, the federal budget deficit is currently running near $2 trillion a year, or more than 6% of gross domestic product.
Congress continues to work on a tax-and-spending bill expected to add trillions to the federal debt. The Joint Committee on Taxation estimated the cost at $3.8 trillion over the next decade, though other analysts suggest it could be much higher if temporary provisions are extended.
Moody’s projects federal deficits to widen to nearly 9% of GDP by 2035, up from 6.4% in 2024. This increase is expected to be driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.
Despite these concerns, some analysts believe the market impact may be contained. Barclays analysts said they did not expect the Moody’s downgrade to change votes in Congress, trigger forced selling of Treasuries, or have much impact on money markets. They noted that “Treasuries have often rallied after similar actions in the past.”
For investors, this week will be crucial as they watch how markets digest the news. As HSBC global head of fixed income research Steven Major said, “The question is what is the path to those yields going back down. At the moment you can’t really see it.”
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