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Following a broad weekly rally on Wall Street amid a de-escalation in the US-China trade war, risk-off sentiment once again prevailed in global markets following a major downgrade of US credit ratings by Moody’s. Global equity indices fell during Monday’s Asian session as sell-offs in US assets resumed, with US stock futures, the dollar, and government bonds all declining.

Moody’s downgrades US credit ratings

On Friday, Moody’s Ratings, a major American credit rating agency, downgraded the “US long-term issuer and senior unsecured ratings” to Aa1 from the top-tier Aaa due to mounting concerns over rising government debt and widening fiscal deficits.

The agency stated: “Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.”

Moody’s downgrade followed similar moves by rival agencies: Standard & Poor’s cut its US sovereign credit rating to AA+ in 2011, and Fitch Ratings made the same downgrade in 2023.

The decision led to a rise in US government bond yields as investors demanded a higher premium to compensate for perceived risks. The 10-year Treasury yield rose by 5 basis points (1 basis point = 0.01 percentage point) to 4.48% on Friday, climbing further to 4.51% during Monday’s Asian session. The downgrade also appeared to dampen investor appetite for other US assets, including equities and the dollar.

Moody’s expects federal budget flexibility to remain “limited” without adjustments to taxation and government spending. The agency projected that the US deficit would expand by approximately $4 trillion (€3.58 trillion) over the next decade if the 2017 Tax Cuts and Jobs Act is extended. “Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021,” Moody’s added.

“It does speak to a level of market risk in US debt, which is to say that the value of US bonds could be compromised if the economy can no longer run at the growth rates necessary to service the government’s liabilities,” Kyle Rodda, senior market analyst at Capital.com in Australia, said.

Risk-off sentiment prevails

US equity futures fell sharply during Monday’s Asian session following Moody’s downgrade. As of 4:42 am CEST, futures on the Dow Jones Industrial Average were down 0.65%, the S&P 500 dropped 0.92%, and the Nasdaq Composite declined by 1.22%.

Asian equities also came under pressure amid the risk-off tone. Japan’s Nikkei 225 dropped 0.66%, Australia’s ASX 200 declined 0.46%, and Hong Kong’s Hang Seng Index slid 0.56% during the same period.

The ripple effect is expected to spill into European markets, though major indices such as the Euro Stoxx 600 and the DAX were set to open flat.

The US dollar also weakened against other G10 currencies, particularly safe-haven currencies including the euro, the Japanese yen, and the Swiss franc. Gold prices rose amid increased haven demand, although the yellow metal pulled back from an intraday high, likely due to pressure from rising US bond yields. Gold futures initially surged over 1% before retreating and were 0.8% higher, trading at $3,213 per ounce as of 4:12 am CEST.

Despite market jitters, Rodda believes the impact of Moody’s move will be short-lived. “I don’t think it will have a lasting impact,” he said, although he views the downgrade as “a reminder of the very loose fiscal policy the US is running and the structural problems related to US public finance.”

May 17 (UPI) — Moody’s Ratings downgraded U.S. debt, becoming the last of the three major credit rating agencies to move in that direction.

The New York-based agency downgraded government long-term issuer and senior unsecured ratings to Aa1 from Aaa this week, while also changing its outlook to negative from a previous rating of stable, Moody’s said in a media release.

“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” Moody’s said in the company’s statement.

“Successive U.S. 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.”

Standard & Poor’s in 2011 became the first of the three nationally recognized statistical rating organizations to lower its U.S. debt rating. It later accused the Justice Department of “retaliation” for filing a $5-billion lawsuit against the credit rating agency.

Fitch Ratings followed in 2021, dropping its American long-term foreign-currency issuer default rating from top-ranked AAA to AA+ amid a political battle over the U.S. debt ceiling. That move elicited then-Treasury Secretary Janet Yellen to blast the move at the time, calling it “unwarranted.”

Moody’s in 2023 signaled it could move in the same direction, putting U.S. banks on a negative watch list and warning of a ‘mild’ recession, and later that year lowering its outlook of U.S. debt.

The agency in November then warned of a potential downgrade.

“Over more than a decade, U.S. federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly,” Moody’s said in its statement this week.

“If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary deficit over the next decade. While we recognize the U.S.’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.”

The White House attempted to shift the blame to former President Joe Biden‘s administration.

“The Trump administration and Republicans are focused on fixing Biden’s mess by slashing the waste, fraud, and abuse in government and passing The One, Big, Beautiful Bill to get our house back in order,” White House spokesperson Kush Desai told reporters Friday.

“If Moody’s had any credibility, they would not have stayed silent as the fiscal disaster of the past four years unfolded.”

Moody’s said it does not expect further downgrades in the near future.

“The U.S. economy is unique among the sovereigns we rate. It combines very large scale, high average incomes, strong growth potential and a track-record of innovation that supports productivity and GDP growth. While GDP growth is likely to slow in the short term as the economy adjusts to higher tariffs, we do not expect that the US’ long-term growth will be significantly affected,” the agency said in its statement.

Moody’s cited rising debt, saying US had repeatedly failed to end the trend of large annual fiscal deficits and interest.

Moody’s Ratings has stripped the United States government of its top credit rating, citing successive governments’ failure to stop a rising tide of debt.

On Friday, Moody’s lowered the rating from a gold-standard Aaa to Aa1. “Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” it said as it changed its outlook on the US to “stable” from “negative”.

But, it added, the US “retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency.”

Moody’s is the last of the three major rating agencies to lower the federal government’s credit rating. Standard & Poor’s downgraded federal debt in 2011, and Fitch Ratings followed in 2023.

In a statement, Moody’s said: “We expect federal deficits to widen, reaching nearly 9 percent of [the US economy] by 2035, up from 6.4 percent in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.’’

Extending President Donald Trump’s 2017 tax cuts, a priority of the Republican-controlled Congress, Moody’s said, would add $4 trillion over the next decade to the federal primary deficit, which does not include interest payments.

The White House adopted an aggressive tone towards Moody’s after the ratings agency downgraded the US credit rating.

White House communications director Steven Cheung reacted to the downgrade via a social media post, singling out Moody’s economist, Mark Zandi, for criticism. He called Zandi a political opponent of Trump.

“Nobody takes his ‘analysis’ seriously. He has been proven wrong time and time again,” Cheung said.

A gridlocked political system has been unable to tackle the huge deficits accumulated by the US. Republicans reject tax increases, and Democrats are reluctant to cut spending.

On Friday, House Republicans failed to push a big package of tax breaks and spending cuts through the Budget Committee. A small group of hard-right Republican lawmakers, insisting on steeper cuts to Medicaid and President Joe Biden’s green energy tax breaks, joined all Democrats in opposing it, a rare political setback for the Republican president.