Moody’s Investors Service has downgraded the United States’ credit rating from the highest triple A to Aa1, citing increasing government debt and elevated interest rates as key factors influencing this decision. This adjustment marks a significant shift in the creditworthiness of one of the world’s largest economies and raises concerns about its fiscal stability.
Or as S&P put it, the exceptional and obvious budgetary burden on the US federal government. Now it’s wrestling with a huge budget deficit that has ballooned to $1.05 trillion this year. That outpaces last year’s same time period by 13%, as this figure illustrates. As interest rates skyrocket, the costs associated with Treasury debt are continuing to grow. Moody’s indicated that “this one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”
Moody’s noted that recent tariff hikes have washed some fiscal balm over the imbalance. Despite this bright patch of news, the overall fiscal picture is still quite bleak. The agency stated, “Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.”
As a result of these shifts, the 10-year Treasury yield rose 3 bps in after-hours trading, to 4.48%. By now, the financial markets had made their reaction known to this swirling uncertainty. In after-hours trading, the iShares 20+ Year Treasury Bond ETF fell close to 1%, with the SPDR S&P 500 ETF Trust down 0.4%.
“Treasurys are still dealing with the fundamental factor of less foreign demand for them and the growing size of the pile of debt that needs to be constantly refinanced is not going to change, but it is symbolic in the sense that here’s a major rating agency that’s calling out that the U.S. has strained debts and deficits.”
Moody’s downgrade should be a wakeup call to the increasing challenges to US fiscal policy. Plus, interest rates are climbing and budget deficits are surging. The government must address these issues directly to regain investor confidence and maintain its credit quality.