Moody’s final downgrade of America’s once-perfect credit rating sends Treasury yields soaring past 5% as markets react to growing concerns about the nation’s $36 trillion debt crisis.

At a Glance

• Moody’s downgraded US credit rating from Aaa to Aa1, ending America’s perfect rating streak that began in 1949ß√√
• Treasury yields spiked dramatically, with 30-year yields exceeding 5% and 10-year yields reaching 4.54%
• US national debt has reached $36 trillion, with Treasury Secretary Scott Bessent dismissing the downgrade as a “lagging indicator”
• Stock futures fell sharply, with Dow futures dropping over 300 points as global markets reacted negatively
• The downgrade follows similar actions by S&P in 2011 and Fitch in 2023, reflecting bipartisan failure to address fiscal deficits

America Loses Its Last Perfect Credit Rating

Moody’s Investors Service has downgraded the United States’ credit rating from Aaa to Aa1, citing persistent fiscal deficits and rising debt levels that have reached $36 trillion. The downgrade marks the end of America’s perfect rating streak that began in 1949 and aligns Moody’s assessment with other major credit rating agencies. S&P downgraded the US in 2011, followed by Fitch in 2023, making this the final loss of America’s top-tier credit status among major rating agencies.

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The immediate market reaction was severe, with Treasury yields spiking dramatically. The 30-year Treasury yield jumped over 12 basis points to 5.02%, while the 10-year yield rose 10 basis points to 4.54%. Even shorter-term debt wasn’t spared, with the 2-year Treasury yield climbing over 2 basis points to 4%. This surge in yields reflects investors demanding higher returns for holding US government debt, effectively increasing borrowing costs for the federal government and American taxpayers.

Biden Administration Downplays Significance

Treasury Secretary Scott Bessent attempted to minimize the importance of the downgrade, suggesting the administration views it as an outdated assessment rather than a reflection of current fiscal challenges. “I think that Moody’s is a lagging indicator. I think that’s what everyone thinks of credit agencies. Larry Summers and I don’t agree on everything, but he said that’s when they downgraded the U.S. in 2011. So it’s a lagging indicator,” Bessent stated in response to the downgrade.

“We’ve inherited a 6.7% deficit-to-GDP, the highest outside war or recession. Our focus is to grow the economy faster than the debt, that’s how we will stabilize debt-to-GDP.” – Treasury secretary Scott Bessent.

Despite the administration’s dismissive stance, stock futures fell sharply following the announcement, with Dow futures dropping over 300 points. The broader market reaction indicates that investors are taking the downgrade seriously, particularly as it coincides with House Republicans advancing President Trump’s tax and spending bill, which analysts warn could further increase the budget deficit and exacerbate existing fiscal challenges.

Moody’s Cites Lack of Fiscal Restraint

In its explanation of the downgrade, Moody’s emphasized that the decision reflected more than a decade of increasing government debt and interest payment ratios that now significantly exceed those of similarly rated sovereign nations. The rating agency also expressed skepticism about Washington’s political capacity to address these fiscal challenges, pointing to a pattern of failed negotiations across multiple administrations.

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

The downgrade raises significant concerns about the safety of Treasurys as a haven asset for global investors. For decades, US government bonds have been considered the world’s safest investment, providing a benchmark for global finance. This perception of safety is now being questioned as America’s fiscal situation deteriorates, potentially forcing overseas investors to reconsider their Treasury holdings and driving borrowing costs even higher.

Global Market Repercussions

The immediate aftermath of the downgrade saw negative reactions across global markets. Asia-Pacific markets declined, with further drops expected on Wall Street. The US dollar weakened against other currencies, compounding the negative sentiment. These market movements reflect growing international concern about America’s fiscal trajectory and the sustainability of its debt levels, particularly as interest payments consume an ever-larger portion of the federal budget.

“This is a major symbolic move as Moody’s were the last of the major rating agencies to have the US at the top rating.” – Deutsche Bank analysts.

Investors are now closely watching for speeches from Federal Reserve officials for insights into how the central bank might respond to these developments. The spike in Treasury yields mirrors a similar jump in April following tariffs implemented by President Trump, suggesting that market concerns about America’s fiscal health are intensifying. Without meaningful fiscal reform from Washington, these pressures on yields and borrowing costs could persist, creating headwinds for economic growth and potentially increasing financial instability.