Moody’s Lowers U.S. Credit Rating Due to Rising Government Debt Levels

Moody's Ratings cut the United States' sovereign credit rating down one notch to Aa1 from Aaa, citing the growing burden of financing the federal government's budget deficit and the rising cost of rolling over existing debt amid high interest rates. The decision to lower the United States credit profile is expected to lift the yield that investors demand in order to buy U.S. Treasury debt to reflect more risk, and could dampen sentiment toward owning U.S. assets, including stocks. The yield on the benchmark 10-year Treasury note climbed 3 basis points in after-hours trading, trading at 4.48%. The iShares 20+ Year Treasury Bond ETF, a proxy for longer term debt prices, fell about 1% in after hours trading, while the SPDR S&P 500 ETF Trust, that tracks the benchmark index for U.S. stocks, dropped 0.4%. Moody's had been a holdout in keeping U.S. sovereign debt at the highest credit rating possible, and brings the 116-year-old agency into line with its rivals. Standard & Poor's downgraded the U.S. to AA+ from AAA in August 2011, and Fitch Ratings also cut the U.S. rating to AA+ from AAA, in August 2023. The U.S. is running a massive budget deficit as interest costs for Treasury debt continued to rise due to a combination of higher rates and more principal debt to finance. The fiscal deficit in the year that began October 1 is already running at $1.05 trillion, 13% higher than a year ago. Revenue from tariffs helped shave some of the imbalance last month. In its statement accompanying the downgrade, Moody's analysts wrote that, "If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade." The Moody's downgrade came as the GOP-led House Budget Committee on Friday rejected a sweeping tax cut package as part of President Donald Trump's economic agenda, including extending tax cuts first enacted in 2017. "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 [Moody's] 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," said Peter Boockvar, chief investment officer at Bleakley Financial Group. The downgrade may lead to a decline in the value of bonds and the dollar, and an increase in the price of gold. "This will make next week interesting," Fred Hickey, a long-time observer of tech stocks and editor of The High-Tech Strategist in Nashua, New Hampshire wrote on X, calling the Moody's downgrade a "Friday afternoon (post close) bombshell."