Moody’s downgrades U.S. credit rating as debt concerns persist

TL/DR –

Moody’s Ratings has become the last major credit-rating agency to downgrade the US federal government’s rating from a top-tier “Aaa” due to ongoing and rising national debt. This follows similar actions by Standard & Poor’s in 2011, and though the initial news caused a drop in US stocks and bond prices, the market quickly recovered, as analysts suggest investors have already accounted for these issues. The downgrade comes at a politically tense time, as potential tax cuts and national borrowing limits are debated in Washington, which could lead to higher interest rates for US households and businesses.

U.S. Stocks Rebound After Moody’s Downgrades U.S. Credit Rating Due to Increasing Debt

U.S. stocks and bonds, as well as the U.S. dollar value, managed to bounce back after a minor shock following the latest warning about the U.S. federal government’s snowballing debt. Moody’s Ratings announced that the government no longer merits an “Aaa” rating, resulting in the slight edging up of the S&P 500 by 0.1%, the Dow Jones Industrial Average by 0.3%, and the Nasdaq composite by under 0.2%.

Moody’s downgrading is based on the U.S government’s increasing borrowings and political disagreements hampering efforts to control Washington’s spending or boost its revenue. Despite these issues being well established, Brian Rehling of Wells Fargo Investment Institute predicts a “limited additional market impact.”

As a result of Moody’s warning, the yield on the 10-year Treasury briefly rose above 4.55%, indicating a hike in interest rates that the U.S. government would have to pay to borrow money for 10 years. It eventually subsided to 4.45%.

How might the Moody’s downgrade affect the U.S. economy?

This downgrade comes during a tense time for Washington, as it prepares to debate potential tax cuts and borrowing limits. Higher borrowing costs for the government could lead to increased interest rates for U.S. households and businesses, impacting mortgage rates, auto loan rates, and credit card charges, potentially slowing down the economy. The Moody’s downgrade coupled with the ongoing trade war has led to uncertainty around the U.S. bond market and the U.S. dollar as safe investment options during crises.

Market Performance Amidst Challenges

Despite the strain from tariffs, the U.S. economy is seemingly holding up, with high hopes for Trump’s eventual concessions on tariffs. This optimism has seen the S&P 500 rally back within 3% of its all-time high. However, major companies like Walmart have warned of future uncertainty, including potential price hikes due to tariffs. Walmart’s stock experienced a 0.1% slip on Monday.

Meanwhile, Novavax saw a 15% rise after U.S. regulators approved its COVID-19 vaccine under some conditions, triggering a $175 million payment from Sanofi.

Overall, the S&P 500 rose to 5,963.60, the Dow Jones Industrial Average to 42,792.07, and the Nasdaq composite to 19,215.46. Foreign stock indexes showcased mixed results, and the U.S. dollar value dropped against other currencies.

AP Writers Jiang Junzhe and Matt Ott contributed.

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