U.S. Treasury yields surged on Monday following Moody’s decision to lower the nation’s credit rating due to financial stability issues. The 30-year Treasury yield jumped more than 10 basis points to stand at 5.025%. Meanwhile, the 10-year yield climbed similarly by about 10 basis points to 4.555%, and the yield on the 2-year Treasury increased by over 2 basis points, reaching 4%.
Investor apprehension grew after Moody’s downgraded the United States’ top-tier credit rating on Friday, reducing it one level from Aaa to Aa1. The downgrade was justified by the agency citing the growing fiscal challenges of managing the government’s budget deficit and the rising expenses of refinancing existing debts in a high-interest environment.
Last week, Moody’s Investors Service downgraded the United States from its longtime Aaa status to Aa1, stripping the nation’s last premier credit rating by citing concerns over government debt and deficits.
This decision marks a critical moment for President Donald Trump’s economic story just as Congress faces setbacks regarding his prominent spending bill. The downgrade came alongside a lack of success for Trump’s substantial tax and spending proposal, hindered by Republican fiscal conservatives during a key vote.
Moody’s action follows the paths of S&P in 2011 and Fitch in 2023, positioning the U.S. without any triple-A ratings from major agencies.
Moody’s outlined that the downgrade is due to a significant rise over the past decade in government debt and interest payment ratios, both of which now exceed those of comparable sovereigns. They anticipate federal deficits to escalate to nearly 9% of the GDP by 2035, influenced by increasing interest expenses, entitlement spending, and stagnant revenue growth. Subsequently, US federal debt could climb to 134% of GDP by 2035, up from 98% the previous year.
Moody’s indicated the downgrade is a reflection of Washington’s ongoing struggle to effectively tackle structural fiscal problems, noting the continuous failure of successive US administrations and Congress to implement measures to reverse the trend of persistent large annual fiscal deficits and rising interest expenses. Moody’s added that they do not expect significant multi-year reductions in mandatory spending and deficits to emerge from the current fiscal proposals being evaluated.
