Moody's Downgrade Intensifies Investor Worry Over US Fiscal Path

Investors Brace For Higher Borrowing Costs, Market Volatility As Congress Debates Trump's Tax Bill, Spending Cuts

- Reuters

A U.S. 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.

The global ratings agency has 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.

US President Donald Trump's sweeping tax-cut bill, which had been stalled for days by Republican infighting over spending cuts, won approval from a key congressional committee on Sunday in a rare victory for Trump and House Speaker Mike Johnson.

Uncertainty over the final shape of the bill has weighed on markets. "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 early Monday trade, 30-year US Treasury yields briefly rose above 5% and were last trading 10 basis points higher on the day.

Even so, the ratings cut was not likely to trigger forced selling from funds that can only invest in top-rated securities, said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, as most funds revised guidelines after the S&P downgrade.