Fears of US Losing Final AAA Rating Amidst Political Turmoil and Potential Government Shutdown Worry Wall Street

On Oct 5, 2023

TL/DR –

Wall Street is concerned about the potential downgrade of the U.S. government’s AAA credit ratings as political and fiscal instability grows. Following downgrades by S&P Global in 2011 and Fitch Ratings in August, Moody’s Investors Service is the only major credit-rating firm still giving the U.S. its top ratings. However, with threats of another government shutdown, Moody’s warned that this “would be a credit negative for the U.S. sovereign” and it could further impact the $25 trillion U.S. Treasury market.

US Credit Rating Downgrade Looms Amid Political Turmoil

The US faces a potential downgrade from its sterling AAA credit rating, thanks to a fraught political climate and the potential for another government shutdown. Moody’s is the only major credit-rating firm to retain its top rating for the country, following previous downgrades by S&P Global and Fitch Ratings.

However, a recent political upset in Capitol Hill, specifically the abrupt end to Kevin McCarthy’s tenure as House Speaker, is causing increasing concern. With a temporary spending bill set to run its course by mid-November, there is potential for another government shutdown, which could jeopardize the US’s remaining top-tier credit rating.

Rising Treasury yields threaten to disrupt the $25 trillion US Treasury market, where yields have recently risen to a 16-year high. Moody’s warned in September that a shutdown would be detrimental to the U.S., citing political polarization and less robust fiscal policy-making compared to other AAA-rated countries.

Amar Reganti, a fixed-income strategist for Hartford Funds, points out that Moody’s may already be preparing to downgrade the U.S if a shutdown occurs. The emphasis seems to have shifted less from the sustainability of the US’s $33 trillion debt to the functionality of elected officials in the decision-making process.

Meanwhile, Fitch Ratings commented on the ongoing instability in Washington, stating that a government shutdown later in the year cannot be ruled out. Despite this, Fitch maintains its AA+ rating and a stable outlook for the U.S.

The large extent of U.S. debt in global financial markets may outweigh its credit rating, particularly since post-2008 reforms have diminished the importance of credit ratings. Should the U.S. face another downgrade, the market impact may be temporary.

Presently, the rise in 10-year Treasury yield has been ascribed to the world’s largest bond market adjusting to the Federal Reserve’s recent hint at prolonged higher interest rates. The critical figure to watch is the 5% level for the 10-year Treasury yield, which is currently hovering around 4.75%.

-Joy Wiltermuth, MarketWatch