The downgrade of US creditworthiness from its pristine ‘triple A’ status by Moody’s (MCO:NYSE) comes at a fragile time for investors trying to gauge the impact from tariffs amid a ballooning government budget deficit.
Given that fellow credit rating agencies Fitch and Standard and S&P Global (SPGI:NYSE) had already downgraded US sovereign debt in 2023 and 2011, respectively, in more ‘normal’ times Moody’s move might have been seen as largely symbolic.
Not this time around. On 16 May S&P futures dropped over 1% while Asian and European stocks fell in early trading on Monday (19 May), while US 30-year bond yields breached the psychologically important 5% level and gold jumped over 1%. US markets did eventually recover some poise but sentiment remains fragile.
In foreign exchange markets the euro rose more than 1% against the greenback, leading gains against the world’s reserve currency.
The US dollar has lost more than a tenth of its value against a basket of currencies since the start of 2025 reflecting a dimming of enthusiasm for US assets as investors reallocate to Europe and emerging markets.
Moody’s had held its highest credit rating on the US since 1917 but warned in 2023 that it was at risk of a downgrade.
In a statement Moody’s said the downgrade ‘reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.’
The US budget deficit of $1.8 trillion is more than 6% of gross domestic product. Trump’s bill to extend his 2017 tax cuts won approval from a congressional committee to advance towards passage in the House of Representatives.
As Ed Monk, associate director at Fidelity International explains: ‘Economists worry that when a rise in yields coincides with increased borrowing, interest payments on the debt can grow significantly.
‘The latest tax cuts are expected to widen the US budget deficit, as they are not matched by spending cuts.’
US stocks have largely ignored rising bond yields and sit within striking distance of all-time highs reached in February, following a huge rally.
Notably, despite their higher interest rate sensitivity, technology stocks have led the market’s advance with the Nasdaq Composite index surging around 25% since the lows of the liberation day-induced sell-off in early April.
One datapoint which may prove decisive is that the yield on 10-year treasuries has moved above the earnings yield (the inverse of the price earnings ratio) for the first time since the pandemic.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
magazine
