Jeff D’Auria, Institutional Portfolio Analyst on the BlueBay US Fixed Income team, discusses the fallout from Moody’s cutting America’s triple-A credit rating.
Watch time: 2 minutes, 36 seconds
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Hi, my name is Jeff D’Auria, Institutional Portfolio Analyst on the BlueBay U.S. Fixed Income team. Thank you for joining us today on the weekly fix.
Late last Friday, Moody's downgraded the US Government’s credit rating from triple A (which is the highest credit rating) to double A-One (which is the second highest credit rating). The rationale for this downgrade was attributed to over a decade of inaction by successive US administrations and Congress in addressing large fiscal deficits, and rising debt-interest costs.
This is a major symbolic move, as Moody’s was the last of the major rating agencies to assign the US its top credit rating. Moody’s had placed the US on watch since November 2023, and typically, changes occur within 12–18 months of being placed on this sort of watch. As a result, this news should not have been unexpected.
This downgrade is not a major concern of ours, and we do not anticipate any significant long-lasting effects. There has not yet been any noticeable impact to pricing of securities.
However, given ongoing trade and monetary policy uncertainty, coupled with an evolving demand landscape, the risks are tilted towards a bearish steepening of the yield curve in the near term. The US 30-year Treasury saw a meaningful jump, briefly sitting above +5% yesterday. Outside of this, the market for the most part shrugged off this ratings downgrade and no other major indexes moved too substantially on the following Monday.
Since this announcement was largely anticipated, and with investor positioning now more neutral compared to early April, we expect any market moves to be significantly smaller than those experienced last month post liberation day in the wake of the downgrade. Though, over the longer term, this downgrade could contribute to higher interest expenses.
Within investment-grade bonds, Moody’s decision comes at a time when the market is in strong technical shape. Historically, rising yields tend to reduce demand from retail investors but increase demand from institutional investors. The latter is more critical, as institutional investors represent a much larger share of the ownership of investment-grade bonds.
Thank you for your time and have a great week.
Key points
Growing fiscal deficits and rising debt-interest costs caused Moody’s to downgrade the US government’s credit rating.
Now all three major credit rating agencies no longer give the United States their best rating.
So far, there has not been any noticeable impact on security pricing and the downgrade alone is not a major concern of ours.
However, the downgrade could send ripple effects throughout the economy if it leads to higher interest payments on US debt.