Jason Katz, a Senior Portfolio Manager at UBS, will discuss the implications of a recent downgrade of the US government’s credit rating by Moody’s on “Varney & Co.”
On Friday, Moody’s announced that it had downgraded the US credit rating, citing concerns about increasing national debt. This decision moves the rating further down from the top tier, which could have broader impacts on the market.
Credit ratings are crucial for assessing the creditworthiness of debts issued by both governments and companies. Generally, a higher rating correlates with a lower risk of default compared to those at the lower end of the scale.
A downgrade can signal to the market that borrowing costs might increase due to higher interest rates, as investors demand more compensation for taking on greater risk. For the federal government, this translates into increased interest costs associated with its bonds.
According to Moody’s, the downgrade symbolizes a decade-long rise in government debt and interest payments, indicating levels significantly higher than those of similarly rated sovereigns.
The agency noted that past administrations and Congress have failed to implement measures to reverse the trend of large fiscal deficits and growing interest payments. They expressed skepticism about the potential for meaningful reductions in mandatory spending from current fiscal proposals.
On the 21-notch rating scale, Moody’s has downgraded the US credit rating from AAA to AA1. This news came after markets closed on Friday, May 16. During trading on the following Monday, the benchmark 10-year Treasury bond yield peaked at 4.56%, then settled around 4.45%. Up until recently, yields had mostly remained above 4.5% during March and April.
Ten-year bonds often serve as benchmarks for other interest rates, including those for mortgages and corporate bonds.
Treasury Secretary Scott Bescent referred to Moody’s downgrade as a “lagging indicator,” implying that it reflects past conditions rather than current realities.
In March, Moody’s had raised alarms about the unsustainable growth of national debt, warning that it increased the risk of downgrades. They mentioned that even under optimistic financial scenarios, the affordability of debt would remain weaker than that of other AAA-rated countries.
Interest costs on federal debt are expected to rise dramatically, from 9% of revenue now to about 30% by 2035—a troubling forecast for the federal budget. In the past, these strengths helped maintain AAA ratings and support the dollar’s status as a global reserve currency, but they have also compounded fiscal challenges and elevated debt levels.
This latest downgrade removes the US from the top tier of credit ratings assigned by the three major agencies.
In a related development, Fitch Ratings also downgraded the US from “AAA” to “AA+” in August 2023, citing “governance erosion.” They noted that the federal deficit has been worsening, alongside major upcoming financial pressures from increased spending on social security and Medicare.
The first downgrade of US debt occurred in 2011 when Standard and Poor’s (S&P) lowered it from “AAA” to “AA+” amid a deadlock over spending cuts and debt ceilings.
The S&P indicated that ongoing controversies regarding the statutory debt cap and fiscal policies are unlikely to reduce federal spending increases or stabilize the national debt burden.
