For the U.S., we are in a truly alarming debt-and-deficit situation, with very real prospects of getting much worse coming to a head this week. About the Author Moody’s Ratings recently moved U.S. debt status off its highest ranking. This decision is the result of mounting dissatisfaction over chronic annual fiscal deficits and skyrocketing interest costs. The nation is already laboring under a staggering $36.2 trillion in debt. Of this, the public actually holds $28.9 trillion.
The budget deficit is on track to reach nearly 7% of the gross domestic product (GDP). This trend should deeply alarm anyone who cares about the long-term sustainability of the country’s fiscal health. Those challenges have investors anxious, contributing to a recent spike in bond yields. The yield on the 30-year bond has now risen above 5%, the first time above this level since October of 2023. At the same time, the yield on 10-year notes was pushing up against 4.6%, a high point not reached since February. This rapidly increasing yield is making investors reconsider their belief in the soundness of U.S. debt.
Moody’s Downgrade and Its Implications
Here’s why Moody’s Ratings’ decision to downgrade U.S. debt, which we agree with after the fact, from confluence of continuing and unresolved fiscal challenges.
Policy Innovation
Large annual fiscal deficits remain a key, urgent ongoing problem. At the same time, surging interest costs increase worries over the country’s long-term fiscal outlook. Economists are sounding the alarm over the Republicans’ “irresponsible” budget deficit. Their forecast puts it at over 6.5% –7% of GDP, which jeopardizes long-term debt-to-GDP sustainability.
This unprecedented change marks an economic turning point, indicative of today’s fiscal realities and ongoing financial risks to investors and markets as a whole. At the same time, the U.S. has the opportunity and imperative to further improve upon an already substantial debt load. This will have deep implications for fiscal policy and market confidence. Investors are now requiring higher yields to cover the risks that they see in holding U.S. debt. The combination of this shift is further compounding an already volatile financial environment.
The Impact of Rising Yields on Markets
The bond market’s recent movements indicate a shift in investor sentiment, which may have broader implications for the equity market. When yields go up, so do borrowing costs, which can starve economic growth. That’s all wrong, and the market reacted appropriately and very quickly. Rising yields have led to bubble talks with the concern that the bond market has become the arbiter of equity market direction.
Yields on U.S. debt are on the rise. This increase comes amid worsening trade relations with some of the largest foreign investors in Treasury debt, especially Japan and China, making for a double-whammy disruptive financial picture. Combined, these tensions can result in a poor outlook for demand for U.S. bonds. In response, we might see yields spike, worsening the fiscal doom our nation is already facing.
Legislative Challenges and Future Prospects
President Donald Trump’s spending blueprint will make that picture even bleaker and deficits are already expected to swell. The bill hopes to make tax cuts permanent. It does so without offsetting any new spending, contributing to the overall growth of the budget deficit and undermining future attempts to restore fiscal balance.
Markets are currently betting on making the tax cuts enacted in 2017 permanent, along with eliminating taxes on tips and overtime—with only partial offsets for revenue loss. Such measures would only worsen the fiscal damage, setting the nation on a path toward a downward spiral for the nation’s economic health.