Long-dated Treasuries fell on Monday as investor attention turned to the US’s ballooning debt after Moody’s Ratings stripped the nation of its last top credit rating.
The 30-year yield rose as much as eight basis points to 5.02%, the highest since November 2023. The benchmark 10-year rate climbed seven basis points to 4.55%. The dollar fell against all of its Group-of-10 peers, with the euro surging 1% to US$1.1274 ($1.46).
Moody’s announced Friday evening it was downgrading the US to Aa1 from Aaa, reinforcing Wall Street’s growing worries over the nation’s fiscal outlook as Capitol Hill debates even more unfunded tax cuts. The company, which trailed rivals, blamed successive presidents and congressional lawmakers for a ballooning budget deficit it said showed little sign of narrowing.
“I wouldn’t over emphasize the importance of this downgrade – but it adds to the ‘de-dollarization‘ theme that was already in place,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho International Plc.
Moody’s was the last of the three main rating firms to remove the US top-tier rating. S&P Global Ratings was the first to move in 2011, while Fitch Ratings followed in 2023. Both have the nation at AA+.
The latest downgrade was anticipated by many given it came when the US federal budget deficit is running near US$2 trillion a year, or more than 6% of gross domestic product. The government is also on track to surpass record debt levels set after World War II, reaching 107% of GDP by 2029, the Congressional Budget Office warned in January.
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“We view this latest credit action as a headline risk rather than a fundamental shift for markets,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “While the downgrade may lean against some of the recent ‘good news’ momentum, we do not expect it to have a major direct impact on financial markets.”
Still, some analysts say the latest news are just another reason for investors to remove money from dollar-denominated assets, continuing a trend that started with President Donald Trump’s trade tariff announcement last month. The Bloomberg Dollar Spot Index fell as much as 0.6% on Monday, and US stock futures also slid.
“The synchronized selling of USD, Treasuries and US stocks highlight the growing loss of confidence in the US economy,” Elias Haddad, a currency strategist at Brown Brothers Harriman & Co. wrote in a note.
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A key US House committee on Sunday advanced Trump’s giant tax and spending package after Republican hardliners won agreement from party leaders to speed up cuts to Medicaid health coverage. Mizuho’s Rochester said this was also weighing on US Treasuries on Monday.
Moody’s said it expects “federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.”
US Treasury Secretary Scott Bessent downplayed concerns over the US’s government debt and the inflationary impact of tariffs, saying the Trump administration is determined to lower federal spending and grow the economy. Asked about the downgrade during an interview on NBC’s Meet the Press with Kristen Welker, Bessent said, “Moody’s is a lagging indicator — that’s what everyone thinks of credit agencies.”
“The downgrade doesn’t affect the role of US Treasuries in the global plumbing system,” said Alfonso Peccatiello, chief investment officer at Palinuro Capital, explaining that it’s unlikely to impact holdings of commercial banks and pension funds according to the Basel regulatory framework. “Unless investors initiate a self-fulfilling fire-sale there shouldn’t be much impact from Moody’s action.”
In a move that may help temper some of the negative market sentiment, President Trump said over the weekend he’ll have a phone call with Russian President Vladimir Putin on Monday morning to discuss how to stop the war in Ukraine.
But angst around ballooning government spending is likely to remain a focus for investors around the world, with fiscal strains evident in nations from Japan to the UK. Japanese Prime Minister Shigeru Ishiba said the country’s financial conditions are worse than Greece’s on Monday, and even historically austere Germany is set to dramatically ramp up spending.
European long-dated government bonds also took a hit on Monday. The yield on 30-year German notes rose seven basis points to 3.11%, while equivalent rates on Italian, French and UK debt posted even bigger increases.
