Market Commentary – Moody’s Downgrade of the US
By: Eric Sterner, CFA, CAIA, FRM, CIPM
Chief Investment Officer, Apollon Wealth Management and Apollon Financial
Last Friday Moody’s Ratings stripped the United States of its highest rating. Moody’s lowered the US credit score from Aaa to Aa1. The news was not shocking as the credit rating agency had lowered the US rating outlook to negative from stable in November 2023. Typically similar outlook changes are followed with a rating action over the next 12 to 18 months. So let’s review why it happened.
Why the US was Downgraded
Moody’s blamed successive administrations and Congress for swelling budget deficits with no signs of slowing down. In January, the Congressional Budget Office warned that the US government is on track to surpass record debt levels set after World War II, reaching 107% of GDP by 2029. Over the weekend, US lawmakers were working on an enormous tax and spending bill that is projected to add trillions to the federal debt over the coming years.
Moody’s said it expects “federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.” Moody’s downgrade is the last of the three biggest ratings agencies. S&P Global Ratings was the first major agency to remove the US of its top AAA rating back in 2011. Fitch Ratings downgraded the US in August 2023 by one level to AA+ when lawmakers took the US to the brink of default due to debt ceiling arguments.
What Does Moody’s Downgrade Impact
For now, not much. The US debt level has been rising for years through both Democratic and Republican administrations. Neither the stock market nor Treasury yields displayed much reaction as both were relatively flat on Monday in the first day of trading since the Moody’s news. However, if interest rates rise further, it could dampen investors’ enthusiasm for stocks. The 10-Year Treasury yield is hovering near 4.5% and the stock market has rallied significantly over the past several weeks. If the 10-Year Treasury climbs further and approaches the 5% level, we could see many investors sell-off equities and reallocate to fixed income.
While some media outlets have predicted that US Treasuries and the Dollar are losing their status as safe haven investments, I would disagree. There’s no current investment to claim that status from US Treasuries or the Dollar and foreign demand for US Treasuries remains strong. The United States remains the biggest economy in the world with structural advantages in innovation and capital markets. I remain optimistic moving forward with strong corporate profits and the resiliency of the US labor markets and consumers. The current deficit levels are not sustainable in the long-term, so we must hold both sides of the aisle in Washington DC accountable for implementing change.
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