Moody's has lowered the United States' credit rating by one notch, moving it from Aaa to Aa1. The decision was attributed to the continued growth in U.S. government debt.

Washington

Moody's Investors Service has lowered the United States' credit rating by one notch, moving it from Aaa to Aa1. The decision was attributed to the continued growth in U.S. government debt. Moody’s indicated that this change reflects concerns regarding fiscal discipline and the rising burden of government borrowing.

Experts have provided a range of reactions to the downgrade. Some suggest that while the change may receive significant attention in media and political circles, its practical impact could be limited. They note that past downgrades, including those in 2011 and 2023, have not fundamentally altered global market confidence in U.S. debt.

The downgrade is viewed in the broader context of trends among major economies, where budget deficits and high government debt levels have become common. Observers have pointed out that markets themselves, including purchasers of U.S. government securities, ultimately determine the importance of a credit rating.

Some experts believe the downgrade may lead to modest changes in the cost of borrowing for the U.S. government and could have ripple effects in the broader economy. Others argue that credit ratings of sovereign nations play a more symbolic role, especially for countries that control their own currency. The consensus among some analysts is that market reaction, especially in the bond market, will be a more significant indicator of the downgrade’s effect than the rating itself.

Additionally, the current bond market environment is noted, with some analysts suggesting the downgrade presents an opportunity for investors, particularly given prevailing interest rates on U.S. Treasury securities.



Moody's downgrades U.S. credit rating

Part of me wants to look at the downgrade as something probably a bit more important than it is. And what I mean by that is, as we see our politicians in D.C. trying to figure out and push through the budget, I would hope that the Moody's message and some of the agita that the media expressed when it occurred will hit home. I would like to see a little fear on deficits. I would like to see the threshold of worrying about deficits raised a bit. But that's not the reality. That's what I wish. The reality is that it really is putting things in line. I think even the ones in 2011 and 2023. You know who's the best rating agency in this day and age we live in? The markets. The big users. The end users. The purchasers of these securities. Well, I think it's important in the context of this is a global phenomenon. We've seen for not just the last decade, multiple decades, global sovereigns, particularly G-10 sovereigns, continuing to try to run their economies at full employment at all costs using fiscal stimulus with large budget deficits. The U.S. is pretty much the last in line here to really catch the eye of the rating agencies. So this was inevitable. This was a decade or more coming. I think what's suspicious is the timing of this right around the beginning of budget discussions for the next fiscal year. And just after we had a bond market tantrum, I'll leave that up to viewers to decide whether there was any motivation with that. With that downgrade, it will have implications for the cost of capital and a bunch of other things. And so it could have a ripple through the economy. I think we'll have to wait three to six months to start to see where this settles out. And I think that'll be an important determinant about people's willingness and appetite for investing in the U.S. I think it's actually completely irrelevant, to be honest with you. And it was irrelevant largely in 2011 or any other time one of these rating agencies has come out with a call. I mean, rating agencies should be looking at company balance sheets, not country balance sheets. They're just not really equipped to do that. The U.S. prints its own currency like many other countries. And the idea of default risk is just a really silly idea, to be honest with you. What I care about is the bond market reaction. And you know, it's up to those folks to sort of say what those implications are. I think most of them would probably tell you mechanically there's not a ton of importance here. This is more symbolic. But at the same time, if it's going to push 10-year Treasury yields up, my market is going to care because that impacts valuation multiples. It impacts debt, right, interest expense and those sorts of things. My view, it's amazing that it took them almost 12 years, maybe almost 15 years to catch up with S&P. But here we are. There's movement. This is an excellent opportunity to be adding bonds and adding duration. We're essentially exactly where we were when we had the pause with China to begin with. That's when 10-year went to about $4.54, and that's exactly where we are now. I think it's a great time. In fact, in my view, the more interesting thing is to see the two-year now over 4%. I think you're going to see a lot of people lock in that type of rate, especially money market people, short-term people, because that is where a lot of value exists. Yeah. Yeah.

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