Moody’s Feels Blue, Downgrades US Debt

After markets closed Friday, credit rater Moody’s decided to kick off the weekend in style—by downgrading America’s credit rating. It was the last remaining major firm rating US debt “AAA,” so headlines quickly pounced on this as a sea change. Kiss the top rating goodbye, or thereabouts. But for investors, this is non-news. Ratings are opinions formed largely on factors we all know, don’t really reflect creditworthiness and rarely have unique insights markets haven’t long since chewed over and digested.

Citing budget deficits approaching $2 trillion a year ballooning government debt toward $37 trillion, Moody’s cut the US’s sovereign bond rating to Aa1 from Aaa—a year after downgrading its outlook to negative.^[i] As Moody’s did what it said it would do, this isn’t exactly a surprise nor anything new to markets. Especially since it comes after Fitch’s 2023 downgrade and S&P’s in 2011—neither of which doomed US debt.

Since 2011’s was the first, it was arguably the biggest shock coming after a bruising debt ceiling battle—following a long string of many ... which continue seemingly ad nauseum to this day. It even earned the dreaded “Black Monday” moniker at the time, which most don’t even remember, coming amid a correction now more associated with eurozone debt than US! Why do few seemingly recall this? Because it was a non-event. As Exhibit 1 shows, Treasury yields dropped in the aftermath—borrowing became easier for Uncle Sam, which we think should give investors a clue to America’s actual creditworthiness.

Exhibit 1: Downgrades Don’t Affect Borrowing Costs

Source: FactSet, as of 5/19/2025.

When more than a decade later Fitch gave its two cents after 2022’s soaring (but transitory) inflation drove Treasury yields higher, interest rates rose for a spell. But they settled back into a range we are still in today. Gamechanger? Nope. The reasons Fitch gave were essentially the same as S&P’s more than a decade earlier—and Moody’s Friday: fears over spending, insufficient taxes and politicians’ apparent inability to rein in resulting deficits that add to mounting debts. Note the US isn’t unique in this regard. Moody’s downgraded France last December and the UK in 2013 for similar reasons. But those press releases came and went to similar effect—with nary a market splash.

Why is that? To put it bluntly, credit raters’ verdicts aren’t very important. There. We said it. Get it in your bones. Who isn’t aware the US runs large deficits and its debt is growing? There is a clock. Bi-annual and quadrennial campaign chatter. Headlines galore. Constant talk about the “rising” debt when any look at history shows it doesn’t fall. And as Exhibit 1 also shows, benchmark Treasury yields remain below average historically. For all the talk, fear and headlines, markets don’t show much effect.

So despite headline fears, what really does drive bonds and swing yields? Well, Exhibit 1 offers clues. The late-1970s’ and early-2020s’ spikes, specifically, give a pretty good hint! Prevailing inflation and inflation expectations. If we overlayed CPI, you would see a pretty strong correlation—implying causation. But inflation, while eroding creditors’ purchasing power, is different from credit risk—for the US government, it makes debt easier to fund in real terms. See Ken Fisher’s November New York Post column for more. Most people, rightly, hate inflation. The government isn’t most people.

Ratings are a sideshow. Bond investors care a whole lot less about them than they do getting repaid—with interest. And on that front, US creditworthiness is sterling. This is because its creditworthiness doesn’t depend on the size of the debt—or how much it is growing—but whether Uncle Sam can make his debt payments. Scale America’s debt service costs by government revenues and you find Treasury’s incoming tax take covers its interest payments more than five times over.^[ii] Couple that with the fact US bondholders are first in the receiving line for those internal revenues, and you might say they are exceedingly well serviced.

So to the degree Treasury investors are happy getting paid—with interest—and with no sign on the horizon indicating this is in jeopardy, it stands to reason markets yawned at Moody’s press release Friday. 10-year Treasury yields barely budged. After closing Friday at 4.44%, today as we write, apoplectic headlines warn they have “spiked” to ... 4.49%.^[iii]

The same goes for stocks’ reaction. While some hyped the S&P 500’s -1% initial intraday “slump” ... it is presently sitting up slightly in the early afternoon Eastern time.^[iv] For one, even if the decline held, a 1% move up or down in markets is nothing special—a day ending in “y.” A small gain? Yawn. This, folks, shows what raters’ opinions count for: a drop in the bucket. Like the last go ’round, we don’t think there is anything to see here.