Market reacts to Moody’s downgrade of US credit rating

Just like when you’re randomly reassigned to a middle seat on a long flight, sometimes a downgrade can have an immediately bad impact.

On Friday, ratings agency Moody’s downgraded the credit rating of the US, saying that “successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.”

The direct callout to a lack of fiscal prudence didn’t seem accidental to some. “With tax cuts and tariffs hanging in the balance, Moody’s appears to be sending a message that it thinks these policy changes will, on net, put the US on an even worse fiscal trajectory,” Bank of America Economist Aditya Bhave in a note, per CNBC. “That is, tariff revenues won’t fully offset the cost of the proposed tax bill. We agree.”

The Moody’s downgrade followed a larger trend, as Moody’s became the last of the three major credit rating agencies to issue a downgrade.

By Monday, the market was clearly reacting. Investors dropped bonds, sending treasury yields higher. The 30-year Treasury yield jumped to the 5% range, near a November 2023 recent peak, while the 10-year yield hit just above 4.5%.

Ray Dalio, Bridgewater Associates founder and billionaire, warned that the risk could be sharper than what the recent downgrade encompasses.

In a post on X, Dalio argued “credit ratings understate credit risks because they only rate the risk of the government not paying its debt.”

“They don’t include the greater risk that the countries in debt will print money to pay their debts thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting),” he continued.