Moody’s Downgrades United States Credit Rating

Source Credit : CNBC

Moody's Ratings has downgraded the United States' sovereign credit rating from Aaa, the highest possible rating, to Aa1. This decision reflects concerns regarding the increasing burden of financing the federal government's budget deficit, as well as the escalating costs associated with refinancing existing debt in a high-interest-rate environment.

“This one-notch downgrade on our 21-notch rating scale 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 rating agency said in a statement.

The decision to downgrade the United States' credit profile is likely to result in a marginal increase in the yields that investors require to purchase U.S. Treasury debt, reflecting a heightened perception of risk. This shift could also negatively impact sentiment towards U.S. assets, including equities. However, it is important to note that all major credit rating agencies continue to assign the United States their second-highest available rating, indicating a sustained level of confidence in the nation's financial stability.

In after-hours trading, the yield on the benchmark 10-year Treasury note increased by 3 basis points, reaching 4.48%. Meanwhile, the iShares 20+ Year Treasury Bond ETF, which serves as a proxy for long-term debt prices, experienced a decline of approximately 1%. Additionally, the SPDR S&P 500 ETF Trust, which tracks the performance of the benchmark index for U.S. equities, fell by 0.4%.

Moody's has long maintained its position as a steadfast guardian of the highest credit rating for U.S. sovereign debt, but it has now aligned itself with its competitors in the ratings industry. This decision marks a significant shift for the 116-year-old agency. In August 2011, Standard & Poor's downgraded the U.S. credit rating from AAA to AA+, followed by Fitch Ratings, which similarly reduced the U.S. rating to AA+ from AAA in August 2023. This convergence among major credit rating agencies underscores a growing consensus regarding the challenges facing U.S. fiscal stability.

“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s analysts said in a statement. “We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”