Moody's downgrade adds to investor worry about US credit

A US sovereign downgrade by Moody's has exacerbated investor worries about a looming debt time-bomb that could spur bond market vigilantes who want to see more fiscal restraint from Washington.

- DAVIDE BARBUSCIA

The ratings agency cut America's pristine sovereign credit rating by one notch on Friday, the last of the major ratings agencies to downgrade the country, citing concerns about the nation's growing $36 trillion debt pile.

The move came as Republicans, who control the House of Representatives and the Senate, seek to approve a sweeping package of tax cuts, spending hikes and safety-net reductions, which could add trillions to the US debt pile. Uncertainty over the final shape of the so-called "big, beautiful bill" has investors on edge even as optimism has emerged over trade. The bill failed to clear a key hurdle on Friday even as US President Donald Trump called for unity around the legislation.

"The bond market has been keeping a sharp eye on what transpires in Washington this year in particular," said Carol Schleif, chief market strategist at BMO Private Wealth, who said that Moody's downgrade may make investors more cautious. "As Congress debates the 'big, beautiful bill' the bond vigilantes will be keeping a sharp eye on making them toe a fiscally responsible line," she said, referring to bond investors who punish bad policy by making it prohibitively expensive for governments to borrow.

The downgrade from Moody's, which follows similar moves from Fitch in 2023 and Standard & Poor's in 2011, will "eventually lead to higher borrowing costs for the public and private sector in the United States," said Spencer Hakimian, founder of Tolou Capital Management in New York.

Even so, the ratings cut was unlikely to trigger forced selling from funds that can only invest in top-rated securities, said Gennadiy Goldberg, head of US rates strategy at TD Securities, as most funds revised guidelines after the S&P downgrade. "But we expect it to refocus the market's attention on fiscal policy and the bill currently being negotiated in Congress," Mr Goldberg said.

FOCUS ON BILL