This week, US government debt could be exposed to more pressure after credit rating agency Moody strips the US from its top-notch triple-A credit rating.
The Moody’s hit Washington last Friday, downgrading the US and warned of rising government debt and growing fiscal deficits. Moody’s has now been the last three institutions to downgrade the US credit rating from AAA to AA1 by one notch, downgrading the US.
The move has raised concerns about the rising US fiscal trajectory. Currently, the US national debt is 36 tn (£27 tn), and economists fear Donald Trump’s “one big beautiful bill,” blocked by right-wing lawmakers last Friday, could boost the deficit by cutting taxes.
Explaining the decision, Moody warned that he expects the US budget deficit to continue to rise, criticizing US politicians for not taking action to improve the country’s financial position.
“All US administrations and Congress have not agreed to measures to reverse the trend of large annual fiscal deficits and interest growth. We do not believe that mandatory spending and significant multi-year reductions in deficits will be attributed to current fiscal proposals under consideration,” Moody’s said.
“We expect government revenues to remain significantly flatter over the next decade as qualification spending rises. Second, a sustained, large fiscal deficit will drive high government debt and interest burdens.
Investors hope that the move will not have a permanent market impact, but they are focusing on US debt levels.
Mohamed El-Erian, Chief Economic Advisor at Allianz, posted on X.
The US government’s debt has weakened in recent years. Prices fell, pushing the yield or interest rate on the 10-year Treasury bill to nearly 4.5%. As prices drop, yields rise.
“Downgrades could indicate investors demand higher Treasury yields, which could lead to more sales pressure,” said Tracy Chen, portfolio manager at BrandyWine Global Investment Management.
However, Toby Nangle, former director of Columbia Thread Needle’s asset allocation, said regulators do not tend to distinguish between AAA and AA1 when setting the weight of capital risk. In other words, it appears that banks’ risk-weighted capital asset calculations are unlikely to be affected by changes in ratings.
“So is this downgrade important for financial plumbers? From a mechanical perspective, the answer is almost certainly “nothing,”‘s the answer,” Nangle writes of FT Alphaville.
In 2011, the stock market fell sharply after S&P became the first major credit institution to strip the US from its credit rating.
The market also fell in 2023, when Fitch cut its US rating by one notch, from AAA to AA+.
Now, IG market analyst Tony Sycamore reported, “There is only minor risk aversion through IG’s weekend markets, and after Moody’s announcement, gold trading has risen 0.27% higher and Nasdaq futures have fallen -0.38%.
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Carol Schlife, chief market strategist at BMO Private Wealth, suggests that Moody’s downgrade could make investors more cautious.
“The bond market has been keenly monitoring what’s going on, especially in Washington,” Schreif said.
White House communications director Stephen Chen criticized the Moody’s move and said, “Moody’s economist Mark Zandy is an Obama advisor and Clinton donor, who has never been a tramp since 2016.”
However, Zandi is the main economist of Moody’s analysis and is not his evaluation group.
Some investors noted that the US will not be forced to default on its obligations because it issues US dollars.
“Let’s be authentic. If there’s one asset on this planet with the least chance of default, it’s a US Treasury bond,” said Stephen Innes, managing partner at SPI Asset Management.
“The US government owns world reserve currency, which issues debts in the currencies it prints and manages. If a central bank can recall the liquidity of a settlement with keystrokes, there is no default. It is not moral hazard – it is just an operational fact.”