Investors awoke to renewed turbulence as Moody’s downgraded U.S. sovereign debt from Aaa to Aa1, blaming unfunded tax cuts and swelling deficits. The move reignited a “Sell America” trade, sending benchmark Treasury yields sharply higher and equity futures lower.
By Monday’s open, the 10-year Treasury yield had climbed three basis points to 4.50%, while the 30-year rate rose four to 4.99%. The dollar weakened and S&P 500 futures slid, reflecting growing skepticism over America’s fiscal trajectory.
Market Overview:- Moody’s cuts U.S. credit rating to Aa1, first downgrade since 2011.
- 10- and 30-year Treasury yields surge to multi-month highs.
- S&P 500 futures and dollar index fall amid fiscal concerns.
- Deficits projected to swell to nearly 9% of GDP by 2035.
- Franklin Templeton warns of bear-steepener dynamic as foreign buyers retreat.
- SocGen flags erosion of Treasuries’ safe-haven status.
- Debt-ceiling standoff and tax debate to prolong volatility.
- Yields could climb further if deficit spending accelerates.
- Watch Treasury Secretary Bessent’s policy response and global demand shifts.
- Despite Moody's downgrade, the U.S. retains exceptional credit strengths, including the size, resilience, and dynamism of its economy, and the continued role of the U.S. dollar as the global reserve currency.
- Moody's changed its outlook on the U.S. from "negative" to "stable," suggesting that while concerns exist, the agency does not anticipate an immediate further deterioration in creditworthiness.
- The U.S. has a track record of "very effective monetary policy led by an independent Federal Reserve," which remains a key institutional strength supporting its credit profile.
- Treasury Secretary Scott Bessent dismissed the Moody's downgrade as a "lagging indicator," reflecting the administration's view that their policies will spur economic growth that will manage the debt.
- Some market analysts suggest that the downgrade was already anticipated by markets and may not have a pronounced impact on stocks, especially compared to previous downgrades when markets were already more fragile.
- Enhancing government revenue or curtailing expenditures, which the current administration has stated it is targeting, could potentially lead to a restoration of the AAA rating in the future.
- Moody's downgraded the U.S. sovereign credit rating from Aaa to Aa1, citing escalating national debt (now at $36 trillion), large annual fiscal deficits, and growing interest costs, which could lead to higher borrowing costs for the U.S. government, businesses, and consumers.
- This was the last of the three major rating agencies to strip the U.S. of its top-tier rating, reflecting deepening concerns about the nation's fiscal trajectory and its ability to manage its debt obligations.
- The downgrade was driven by the observation that successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large fiscal deficits and rising interest costs, with federal deficits projected to swell to nearly 9% of GDP by 2035.
- The decision could complicate President Trump's initiatives to implement further tax cuts and may have negative repercussions in global financial markets, potentially reinforcing a "Sell America" trade.
- Higher Treasury yields are an immediate market reaction, with the 10-year and 30-year rates surging, which could exert further downward pressure on the dollar and diminish the appeal of U.S. equities.
- Analysts warn that the downgrade, coupled with unfunded fiscal policies, could lead to a dangerous feedback loop if foreign investors reduce their holdings of U.S. debt, potentially eroding the safe-haven status of Treasuries.
- The timing coincides with contentious debates over tax and spending plans that could deepen the fiscal hole, and a looming debt-ceiling standoff, all of which contribute to market volatility and fiscal uncertainty.
Credit strategist Max Gokhman cautioned that rising yields and fading foreign inflows could trigger a dangerous feedback loop, while Wells Fargo forecast an additional 5–10 basis point rise in long-term rates.
Despite the downgrade, Treasury data show sustained purchases from China and other investors. Markets will now focus on Washington’s fiscal choices this week to determine if the sell-off extends or finds relief.
