Bond Yields Rise on Surprise Downgrade by Moody’s of U.S. Debt

After the closing bell last Friday, it was reported that U.S. sovereign debt was downgraded by Moody’s Ratings due to soaring government debt that’s approaching a staggering $37 trillion.

In dramatic fashion, Moody’s lowered the U.S. credit score to AA1 from AAA, joining Fitch Ratings and S&P Global Ratings in downgrading the world’s biggest economy below the top (AAA and equivalent) position.

This one-notch cut comes more than a year after Moody’s changed its outlook on the U.S. credit rating to negative. The federal budget deficit is running at nearly $2 trillion a year, each year, or more than 6% of gross domestic product (GDP), and Congressional Republicans are pushing through budget legislation that could add debt even faster.

“While we recognize the U.S.’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s wrote in a statement.

The United States is running a massive budget deficit even as interest costs for Treasury debt continued to rise due to a combination of higher rates and more principal debt scheduled to be financed. The fiscal deficit in the year that began October 1, 2024, is already running at $1.05 trillion, 13% above a year ago.

Bond Yields Rise on Surprise Downgrade: Moody’s Ends Rating Hold out

Moody’s had been a holdout in keeping U.S. sovereign debt at its highest credit rating level possible, but Friday’s move brings the agency into line with its rivals. Standard & Poor’s downgraded the U.S. rating to AA+ from AAA in August 2011, and Fitch Ratings cut the U.S. rating to AA+ from AAA, in August 2023.

The rating cut comes at the same time the committee in the House of Representatives initially advanced the House Republicans’ massive tax-and-spending bill late Sunday, The bill now goes to the House Rules Committee where fiscal hawks from both parties will look to make changes before a final vote on the House floor.

Despite returning home from the Middle East with nearly a trillion dollars of commitments by various Arab nations, the $37 trillion elephant in the room is still there, larger and more ominous than ever, and all administrations since 2000-01, the last time there was a budget surplus, are responsible. At the end of 2023, the federal debt-to-GDP ratio was 122%. 

Bond Yields Rise on Surprise Downgrade Has Congressional Implications

With earnings season nearly complete, low inflation numbers just released and Trump’s Middle East fundraiser wrapped up, the market was looking forward to the “One Big, Beautiful Bill” to make it through the House last Friday before moving on to the Senate and being signed into law this week, before Memorial Day. But Friday’s fresh downgrade by Moody’s could stall any near-term passage of the bill until there is bold clarity on the revenue side of this higher spending/lower taxation piece of legislation.

The Moody Blues could put new downward pressure on the dollar, upward pressure on long-term bond yields and gold prices and hopefully put immense political pressure on our elected officials that this ticking debt bomb cannot be kicked down the road any further. America voted for fiscal responsibility when they voted for Trump and the whole DOGE initiative. Dealing with the national debt was a major campaign pledge, and Moody’s just provided a major incentive to get serious about fulfilling that pledge.

Long-term Treasury yields have already been moving higher, with 30-year rates creeping toward 5% as the tax-cut plan adds to concerns about the surging debt load. The U.S. deficit has been in excess of 6% of GDP for the past two years — an unusually high burden outside of economic recessions or world wars.

Chart courtesy of www.stockcharts.com

“Asked why Moody’s would downgrade the U.S. now,” Andrew Brenner at NatAlliance Securities said, “Moody’s is trying to send a message to Congress to get their act together.”

Bond Yields Rise on Surprise Downgrade: Dimon’s View

Jamie Dimon, chief executive officer of JPMorgan Chase & Co., in a Bloomberg Television interview, said “our debts and deficits” create risks of inflation and higher long-term rates. At JPMorgan’s annual Global Markets Conference in Paris, he added that high deficits might slow growth and create a stagflation scenario.

About one-third ($9.3 trillion) of all existing debt held by the public is scheduled to mature between April 1, 2025, and March 31, 2026, according to Peter G. Peterson Foundation. More than $3.1 trillion of the debt set to roll over during that period was last issued two or more years ago, so it will likely need to be reissued at higher rates.

“For those looking for a signpost to tell us when to stop adding to our national debt, they should look no further than Moody’s downgrade,” said Michael Peterson, CEO of the Peterson Foundation. “We have plenty of options to fix this, and it can be done quickly, with leadership.”

Before the Moody’s downgrade crossed the wires last Friday, after hours, equities finished out the week on a strong note as the U.S. and the European Union broke an impasse to enable tariff talks, fueling the risk-on tone that had been sparked by the recent cooling in trade tensions with China. Whether these big steps in progress on trade, reaching a nuclear deal with Iran, striking a truce between Ukraine and Russia can offset this Moody’s news and keep the stock market rally intact this week, but whichever way the market goes this week doesn’t remove the fact that there is no place for this debt elephant to hide.