From the Desk of AgFi’s Business Strategist
Published 5/19/25 – Late Friday afternoon, Moody’s (one of the three major credit rating agencies) downgraded the US credit rating from Aaa, their highest rating, to Aa1, a one-notch reduction. This follows downgrades by Fitch in 2023 and by S&P in 2011. It’s questionable how much effect this downgrade will have, but it is likely to be negative for Treasury securities.
The Moody’s downgrade was based primarily on the level of US debt – now over $36 trillion. But more worrisome is the debt-to-GDP – now at 122%. Most economists believe that debt at more than 100% of GDP is unsustainable because the interest burden on the federal budget will cause the ratio to spiral, leading to even higher interest rates and more debt. Below, you will see the ominous long-term trend of the ratio. Note the spike in 2020 was due to the pandemic.
It is difficult to anticipate how the bond market will react. The early indication is negative, but not too worrisome. Below is a one-year, daily chart of the 10-year Treasury rate from this morning. You may see that the 10-year Treasury rate has spiked to near the highest level over the past several months at 4.55%, but below the high of 4.81% reached in January. Should the rate move above 4.50% and hold, then it is likely to move toward the recent high of 4.81%. But if the rate does not hold above 4.50%, then it could fall back within the range of 4.20%-4.50%.
The current government budget discussions will likely have a significant effect on the direction of interest rates. As noted by Moody’s, there has been a series of administrations that have failed to stem the rise in debt-to-GDP. That must be done to satisfy bond investors and rating agencies.