As Moody's Sharpens Its Focus on U.S Debt, Treasury Securities and the Dollar Fall

U.S. long-term Treasury prices fell on Monday, with investor sentiment shaken by concerns over the country's growing debt load following Moody’s Ratings downgrade of the nation’s final remaining top-tier credit rating. This development pushed yields higher, with the 30-year Treasury yield climbing as much as eight basis points to 5.02%—its highest level since November 2023. The 10-year benchmark yield also rose six basis points, reaching 4.54%. Meanwhile, the U.S. dollar weakened against all of its Group-of-10 currency peers.

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The credit downgrade by Moody’s, announced late Friday, lowered the U.S. rating from Aaa to Aa1. The agency cited the country’s expanding budget deficit and lack of fiscal discipline, assigning blame to both Democratic and Republican leaders over several administrations. The downgrade amplified already growing concerns on Wall Street about the nation’s financial direction, especially as Congress debates additional unfunded tax cuts.

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Jordan Rochester, Mizuho International’s head of macro strategy for the EMEA region, acknowledged that while the downgrade alone might not have an outsized impact, it adds momentum to the broader “de-dollarization” narrative already in progress. Speaking on Television, Rochester noted that market fears of a recession have been exaggerated, citing signs that former President Donald Trump has softened his approach on trade tariffs, with potential for more easing ahead.

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Moody’s downgrade marks the final blow to the U.S.’s once-unblemished credit rating among the three major agencies. S&P Global Ratings was the first to act in 2011, followed by Fitch Ratings in 2023—both assigning the U.S. a AA+ rating.

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The latest downgrade by Moody’s wasn’t unexpected, particularly with the federal budget deficit approaching $2 trillion annually—more than 6% of GDP. In fact, the Congressional Budget Office warned earlier this year that the U.S. is on a path to surpass post-World War II debt levels, potentially hitting 107% of GDP by 2029.

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Despite the negative headline, some strategists believe the market implications are limited. Mark Haefele, chief investment officer at UBS Global Wealth Management, said the downgrade doesn’t represent a fundamental market shift. While it may dampen some of the recent positive economic momentum, Haefele doesn’t foresee a substantial or lasting market reaction.

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Nevertheless, other analysts see the downgrade as another catalyst for the ongoing move away from U.S. assets. Following last month’s renewed tariff threats by Trump, many investors have already begun to shift away from dollar-denominated holdings. On Monday, the Bloomberg Dollar Spot Index dropped as much as 0.6%, reflecting broad-based dollar weakness, while U.S. stock futures also fell.

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Elias Haddad, a currency strategist at Brown Brothers Harriman & Co., noted in a research note that the simultaneous decline in U.S. stocks, Treasuries, and the dollar underscores waning investor confidence in the American economy. He pointed to the Moody’s downgrade as reinforcing those fears.

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Adding to the market pressure was new legislative activity on Capitol Hill. A key House committee advanced a large tax and spending bill over the weekend, following negotiations in which Republican hardliners secured commitments to accelerate cuts to Medicaid. Mizuho’s Rochester suggested that this political development contributed to Monday’s weakness in U.S. Treasury markets.

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Moody’s, in its rationale for the downgrade, projected that U.S. federal deficits could expand to nearly 9% of GDP by 2035—up from 6.4% in 2024. The agency attributed this increase largely to rising interest costs on the national debt, growing entitlement spending, and insufficient revenue collection.

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Treasury Secretary Scott Bessent, however, tried to downplay the concerns. In an interview with NBC’s Meet the Press, Bessent dismissed the downgrade’s significance, labeling Moody’s a “lagging indicator.” He emphasized that the Trump administration remains focused on reducing government spending and stimulating economic growth, pushing back on suggestions that tariffs would lead to higher inflation.

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Attempting to bolster investor sentiment, President Trump revealed over the weekend that he plans to speak with Russian President Vladimir Putin on Monday. The call is intended to discuss possible steps toward ending the conflict in Ukraine—a move that could have geopolitical and economic ripple effects.

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European government bonds mirrored the decline in U.S. Treasuries, with long-end yields leading the drop. Germany’s 30-year bond yield rose six basis points to 3.10%, while yields on similar bonds from Italy, France, and the U.K. posted even larger increases.

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In summary, Moody’s downgrade of the U.S. credit rating has reignited fiscal concerns among global investors, triggering a pullback from Treasuries, a drop in the dollar, and broader market volatility. While some view the move as symbolic, others interpret it as further evidence of eroding confidence in the U.S. economy and its financial stewardship.

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