U.S. credit rating lowered by Moody's due to rise in federal debt accumulation

U.S. credit rating lowered by Moody's due to rise in federal debt accumulation

Why did Moody's downgrade the U.S.A's sovereign credit rating all of a sudden?

Well, it's all about that almighty federal budget deficit. Moody's, tired of watching the deficit balloon and the government's debt skyrocket, decided to pull the trigger, dropping the U.S.A's credit rating from Aaa, the highest possible, to a slightly less glamorous Aa1.

shaking in their boots

Moody's, known for doling out credit ratings with the precision of a surgeon, explained the move by pointing at the ever-increasing burden of financing the federal government's budget deficit and the surging cost of rolling over existing debt due to high interest rates. Moody's analysts weren't pulling any punches, stating that the hike in government debt and interest payment ratios to levels higher than similarly rated sovereigns necessitated the adjustment.

The Decision: A Hard Pill to Swallow(or is it?)

A one-notch downgrade might have caused a shudder to run down the spines of some investors, but it's important to remember that the United States still holds the second-highest available rating across all major credit rating agencies. That's not exactly a demotion to the kiddie pool.

In the aftermath of the downgrade, the yield on the benchmark 10-year Treasury note climbed a measly 3 basis points, trading at 4.48% in after-hours trading, and the iShares 20+ Year Treasury Bond ETF fell about 1% in extended trading, while the SPDR S&P 500 ETF Trust, well, it dropped 0.4%. So, not a total shockwave, but a minor bump in the road for the U.S.A's financial might.

Holdouts No More: Moody's Joins the Party

Moody's had previously been a holdout in keeping U.S. sovereign debt at the highest credit rating possible, but it's not exactly 1955 anymore, and Moody's had to accept the fact that, like it or not, it's not the only kid on the block. In 2011, following Moody's suit, Standard & Poor's downgraded the U.S. to AA+ from AAA, and Fitch Ratings followed suit in 2023, dropping the U.S. rating to AA+ from AAA.

Why Bother with Credit Ratings, Anyway?

Well, credit ratings serve the purpose of indicating the creditworthiness of a borrower, like, say, a nation, to potential lenders. It helps lenders make informed decisions about extending credit and charging appropriate interest rates. In short, it's a measure of whether you're a reliable borrower or not.

The Elephant in the Room: Our Ballooning Deficit

The United States has been running a massive budget deficit as interest costs for Treasury debt continue to rise due to a combination of higher rates and more principal debt. The fiscal deficit in the year that began on October 1 is already running at $1.05 trillion, 13% higher than a year ago.

The Moody's downgrade came as the GOP-led House Budget Committee rejected a sweeping tax cut package as part of President Donald Trump's agenda, including extending tax cuts enacted in 2017.

A Breeding Ground for Debt

The U.S. federal debt is projected to rise to about 134% of GDP by 2035, compared to 98% in 2024, according to Moody's. This tremendous increase in debt is just waiting to choke the life out of any economic progress being made.

To add salt to the wound, interest costs are significantly higher than those of similarly rated sovereigns, and the federal government has been historically unable to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.

Some Food for Thought

Moody's officially rated U.S. bonds in 1993 for the first time, but had assigned a "country ceiling rating" of AAA on the U.S. since 1949. So, while it's a bit of a blow to the U.S.'s credit rating, it's not exactly a new issue. Then again, a financial downgrade a decade in the making is a lot like a slow-motion car crash: you can't look away, but it's hard to register the full impact.

Sources:[1] CNBC[2] The Washington Post[3] The Wall Street Journal[4] The New York Times

1. The United States' ballooning deficit, which has led to an increase in government debt and interest payment ratios higher than similarly rated sovereigns, was cited by Moody's as the reason for its decision to downgrade the U.S.'s credit rating.
2. The downgrade of the U.S.'s credit rating from Aaa to Aa1 by Moody's could have consequences for revenue-generating assets like stocks and bonds, as investors may demand higher interest rates to compensate for the perceived increased risk.
3. Standard & Poor's and Fitch Ratings had previously downgraded the U.S. credit rating, with Standard & Poor's dropping it to AA+ from AAA in 2011, and Fitch Ratings following suit in 2023.
4. Credit ratings serve as a measure of a borrower's creditworthiness and help lenders make informed decisions about extending credit and charging appropriate interest rates. In this case, the downgrade of U.S. credit rating may lead to higher interest rates on bonds and debt.
5. The federal government's inability to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs has contributed to the Moody's downgrade of the U.S.'s credit rating and the projected increase in federal debt to 134% of GDP by 2035. This damaging trend could choke any economic progress being made in the U.S. economy.

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