Moody’s Investors Service has downgraded the United States’ credit rating from Aaa to Aa1. The agency cited the growing burden of government debt and increasing budget deficits as reasons for the decision. This move aligns Moody’s with other major credit rating agencies such as Standard & Poor’s and Fitch Ratings.
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Standard & Poor’s lowered the U.S. rating to AA+ from AAA in August 2011, and Fitch followed suit in August 2023. The downgrade reflects what Moody’s describes as a significant increase in government debt and interest payments over the past decade. It is likely to affect investor sentiment, potentially increasing the yield required for U.S. Treasury debt to reflect the perceived rise in risk.
This could also dampen enthusiasm for U.S. assets, including stocks. The U.S. is operating under a massive fiscal deficit.
Moody’s downgrades US credit rating
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The current fiscal year, which began on October 1, is already running a deficit of $1.05 trillion, a 13% increase from the previous year. These rising costs are partly driven by higher interest rates and an increasing amount of principal debt to finance. Moody’s analysts noted that if the 2017 Tax Cuts and Jobs Act is extended, it could add around $4 trillion to the federal deficit over the next decade.
They project that federal deficits could reach nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments, rising entitlement spending, and relatively low revenue generation. By 2035, the federal debt burden could climb to about 134% of GDP, compared to 98% in 2024. In reaction to the downgrade, the yield on the benchmark Treasury climbed 3 basis points in after-hours trading, trading at 4.48%.
Meanwhile, U.S. stock indices and long-term debt prices experienced slight declines. Less foreign demand for U.S. Treasuries and the increasing need to refinance a substantial debt load are persistent issues. Peter Boockvar, chief investment officer at Bleakley Financial Group, commented, “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.”
Despite the downgrade, all major rating agencies continue to give the United States their second-highest available rating, reflecting sustained confidence in the country’s economic stability, albeit with noted concerns about fiscal management.
