Moody’s Investors Service has downgraded the United States’ sovereign credit rating from Aaa to Aa1, citing escalating concerns about the federal government’s budget deficit and the rising costs of servicing existing debt amid high interest rates. The agency described the downgrade as a reflection of the significant increase in government debt and the rising ratio of interest payments over the past decade, which are now higher than those of similar-rated sovereign nations.
Analysts from Moody’s indicated that this adjustment would likely lead to higher yields demanded by investors for U.S. Treasury securities, given the perceived increase in risk. This sentiment could adversely affect the attractiveness of U.S. assets, including equities. However, it is noteworthy that the major credit rating agencies continue to assign a second-highest rating to the U.S. Despite the downgrade, the 10-year Treasury yield rose to 4.48% in after-hours trading, reflecting a 3 basis-point increase. The iShares 20+ Year Treasury Bond ETF fell about 1%, while the SPDR S&P 500 ETF Trust saw a 0.4% drop.
This downgrade aligns Moody’s with its peers; both Standard & Poor’s and Fitch Ratings previously lowered the country’s rating to AA+. S&P made its revision in August 2011, while Fitch followed suit in August 2023. Moody’s analysts emphasized that repeated failures from various administrations and Congress to address the growing fiscal deficits and interest costs have contributed to this unfavorable scenario. They stated, “We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
Currently, the U.S. finds itself grappling with a considerable budget deficit, with interest costs on Treasury debt rising due to elevated rates and an increased principal debt load. As of October 1, the fiscal deficit sits at $1.05 trillion—13% higher than the previous year. While tariffs helped mitigate some disparities recently, the long-term outlook remains grim. Moody’s warned that if the 2017 Tax Cuts and Jobs Act remains in effect, it could add approximately $4 trillion to the federal fiscal primary deficit over the next decade.
Looking ahead, the agency predicts federal deficits could balloon to nearly 9% of GDP by 2035, up from an estimated 6.4% in 2024, influenced primarily by escalating interest payments, growing entitlement spending, and relatively stagnant revenue generation. Furthermore, Moody’s anticipates the federal debt burden to rise to about 134% of GDP by 2035, compared to 98% in 2024.
The downgrade coincided with the GOP-led House Budget Committee’s recent rejection of a significant tax cut proposal, part of former President Donald Trump’s economic agenda. Peter Boockvar, chief investment officer at Bleakley Financial Group, remarked, “This downgrade is symbolic, reflecting the U.S.’s strained debts and deficits amidst less foreign demand for Treasuries.”
In early April, Treasury yields climbed, and the dollar weakened against other currencies, hinting at a potential shift in investor confidence regarding the U.S. as a safe haven. Market analyst Fred Hickey noted the implications of the downgrade, calling it a “Friday afternoon bombshell” and suggesting it could lead to declines in bond and dollar values, alongside a rise in gold prices.
Historically, Moody’s first rated U.S. bonds in 1993, maintaining a “country ceiling rating” of Aaa since 1949. This recent downgrade marks a pivotal moment in the ongoing conversation about the fiscal health of the United States.
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Original Source: https://www.cnbc.com/2025/05/16/moodys-downgrades-united-states-credit-rating-on-increase-in-government-debt.html
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Publish Date: 2025-05-17 18:01:00
