On Wednesday, financial markets were rocked in historic fashion. This increase was largely the result of increasing anxiety over the stability of US investments following Moody’s downgrade of its credit rating. The downgrade’s impact has pushed the US’s sovereign credit rating from Aaa to Aa1. This modification might be seen as contradictory, given concerns over the nation’s growing deficit and increasing debt levels.
Following the announcement of the downgrade, yields on short- and long-term Treasury notes both increased significantly. In the most recent auction, the yield at this maturity rose to a new high of 5.047%. Analysts viewed this result as a letdown. That was a jump from the previous auction in February, where the yield was 4.83%. Last week, the yield on the 10-year Treasury note climbed over 4.59%, its highest level since February. The 30-year Treasury yield followed suit, breaking above the 5% mark, reaching its highest level in 2023.
Together, these changes triggered massive sell-offs in domestic equities and Treasuries. The S&P 500 index fell 1.25%. This is its second consecutive day of losses after ending a six-day streak of gains on Tuesday. The Nasdaq Composite fell over 1%, making for a horrible day on Wall Street.
The US dollar index dropped 0.6%, a sign of investor worries about the larger economic picture. The lackluster showing at the 20-year Treasury auction was enough to send US stocks crashing. Big moves occurred just after the auction concluded at 1 p.m. ET.
Chip Hughey, an economist and former state DOT official, responded to Fitch’s recent downgrade and the market’s reaction.
“Although Moody’s decision to downgrade the US’s sovereign credit rating on Friday from Aaa to Aa1 was unsurprising, it does add focus on the real issues at hand: the US’s growing deficit and debt burden,” – Chip Hughey.
Hughey emphasized the significance for investors from around the world. He noted that the way we’ve been debating budgets lately in Washington does nothing to inspire confidence in how we will meet these challenges tomorrow.
“Recent budget deliberations in Washington are not offering global investors much solace that these challenges are being incorporated into the decision-making process,” – Chip Hughey.
Taken together, these comments highlight a deepening investor concern with respect to fiscal policies that prioritize short-term political gains over long-term economic health. With that in mind, market participants will be keenly observing the next moves from Washington and various economic releases to get a read on what’s ahead.