19. 5. 2025
- Josef Brynda
On Friday, May 16, 2025, Moody’s Investors Service downgraded the United States’ credit rating from the highest level Aaa to Aa1. For the first time in over a century, the U.S. has lost its last remaining top-tier credit rating from the major rating agencies. The downgrade is attributed to persistent high fiscal deficits, rising debt servicing costs, and the inability of political leaders to implement effective measures to stabilize public finances.
Reasons for the Downgrade
According to Moody’s, U.S. federal debt has reached $36 trillion and could grow to 134% of GDP by 2035. The agency also warns that interest payments could consume up to 30% of federal revenues by then. Moody’s criticized both current and past administrations for their lack of fiscal discipline and political unwillingness to address the structural imbalance between revenues and expenditures.
Market Reaction
Markets reacted negatively to the announcement. Futures on U.S. stock indices fell—S&P 500 by 1.2%, Dow Jones by 0.8%, and Nasdaq by 1.22%. Yields on 10-year Treasury bonds rose to 4.54%, and 30-year yields exceeded 5%, all during the Asian trading session. The U.S. dollar weakened against major global currencies, while gold prices increased by 0.8% to $3,213 per ounce. European and Asian equity markets also recorded losses.
Political Reactions
The Treasury Department, led by Scott Bessent, called the Moody’s move a “delayed indicator” that merely confirms existing issues. It blamed the previous Biden administration for excessive government spending. In contrast, Democrats criticized the proposed “One Big Beautiful Bill”, which would extend the 2017 tax cuts and, according to estimates, increase the deficit by more than $3 trillion over the next decade.
Impact on Bonds and the Yield Curve
The downgrade increases the perceived risk of U.S. Treasury bonds, meaning investors will demand higher yields as a risk premium. This could make borrowing more expensive not only for the federal government but also for the private sector, including mortgages, consumer loans, and corporate bonds. The result may be a broad tightening of financial conditions across the economy.
Impact on the U.S. Dollar
During the European session, the U.S. dollar weakened against major currencies, falling by more than 1% against the euro. Investors are increasingly considering a shift to alternative safe-haven assets, such as the Swiss franc or gold, which undermines the dollar’s status as the world’s primary safe haven. This trend may continue if concerns over the U.S.'s debt sustainability persist.
On the other hand, rising U.S. bond yields increase the real interest rate differential relative to other currencies, which could support the dollar. The result may be a mixed and volatile outlook, heavily influenced by market expectations surrounding future Fed actions and U.S. fiscal policy. According to Fed officials and underlying economic data, the economy is not currently operating below its potential—the labor market remains strong, GDP growth is projected to rebound in Q2, inflation is relatively contained, and interest rates remain elevated.
Conclusion
The downgrade comes at a time of growing fiscal uncertainty and rising debt service costs. In the long term, this could lead to permanently higher borrowing costs for both the government and private sector and erode investor confidence in U.S. assets. Nevertheless, U.S. Treasuries remain a key safe-haven asset in times of global turmoil, which may mitigate the impact of the rating downgrade.
However, for the Treasury market to stabilize, fiscal measures from the Trump administration will likely be necessary, and are expected to arrive sooner or later. A critical factor going forward will be how fiscal policy addresses the debt brake and whether it manages to restore market confidence in U.S. public finances.
