(Bloomberg) — Investors faced yet another bumpy start to the trading week with US assets coming under fresh pressure, although it\u2019s mounting concern over American debt rather than tariffs generating the volatility this time.<\/p>\n
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US equity and bond futures retreated with the dollar in early Asia trading after Moody\u2019s Ratings announced Friday evening it was stripping the American government of its top credit rating, dropping the country to Aa1 from Aaa. The company, which trailed rivals, blamed successive presidents and congressional lawmakers for a ballooning budget deficit it said showed little sign of narrowing.<\/p>\n
The downgrade risks reinforcing Wall Street\u2019s growing worries over the US sovereign bond market as Capitol Hill debates even more unfunded tax cuts and the economy looks set to slow as President Donald Trump upends long-established commercial partnerships and re-negotiate trade deals.<\/p>\n
On Friday, 10-year Treasury yields rose as high as 4.49% in thin volumes.<\/p>\n
\u201cA Treasury downgrade is unsurprising amid unrelenting unfunded fiscal largesse that\u2019s only set to accelerate,\u201d said Max Gokhman, deputy chief investment officer at Franklin Templeton Investment Solutions. \u201cDebt servicing costs will continue creeping higher as large investors, both sovereign and institutional, start gradually swapping Treasuries for other safe haven assets. This, unfortunately, can create a dangerous bear steepener spiral for US yields, further downward pressure on the greenback, and reduce the attractiveness of US equities.\u201d<\/p>\n
Michael Schumacher and Angelo Manolatos, strategists at Wells Fargo & Co., told clients in a report that they expect \u201c10 year and 30 year Treasury yields to rise another 5-10 basis points in response to the Moody\u2019s downgrade.\u201d<\/p>\n
A 10-basis point increase in the 30-year yield would be enough to lift it above 5% to the highest since November 2023 and closer to that year\u2019s peak, when rates reached levels unseen since mid-2007.<\/p>\n
While rising yields typically boost a currency, the debt worries may add to skepticism over the dollar. A Bloomberg index of the greenback is already close to its April lows and sentiment among options traders is the most negative in five years.<\/p>\n
In April, US markets across the board came under pressure after Trump\u2019s tariff pledges forced a reappraisal of their place at the core of many investor portfolios. The selloff reversed in parts after the US president paused tariffs on China, but investor focus in the bond market quickly shifted to America\u2019s fiscal trajectory.<\/p>\n
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\u2018Loss of Confidence\u2019<\/p>\n
European Central Bank President Christine Lagarde told La Tribune Dimanche in an interview published on Saturday that the dollar\u2019s recent decline against the euro is counterintuitive but reflects \u201cthe uncertainty and loss of confidence in US policies among certain segments of the financial markets.\u201d<\/p>\n
Rising Treasury yields would also complicate the government\u2019s ability to cut back by running up its interest payments, while also threatening to weaken the economy by forcing up rates on loans such as mortgages and credit cards.<\/p>\n
US Treasury Secretary Scott Bessent downplayed concerns over the US\u2019s government debt and the inflationary impact of tariffs, saying the Trump administration is determined to lower federal spending and grow the economy.<\/p>\n
Asked about the Moody\u2019s Ratings downgrade of the country\u2019s credit rating Friday during an interview on NBC\u2019s Meet the Press with Kristen Welker, Bessent said, \u201cMoody\u2019s is a lagging indicator \u2014 that\u2019s what everyone thinks of credit agencies.\u201d<\/p>\n
In a move that may help temper some of the negative market sentiment, President Trump said over the weekend he\u2019ll have a phone call with Russian President Vladimir Putin on Monday morning to discuss how to stop the war in Ukraine.<\/p>\n
Moody\u2019s move was anticipated by many given it came when the federal budget deficit is running near $2 trillion a year, or more than 6% of gross domestic product. The US 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.<\/p>\n
Moody\u2019s said it expects \u201cfederal 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.\u201d<\/p>\n
Despite such sums, lawmakers will likely continue work on a massive tax-and-spending bill that\u2019s expected to add trillions to the federal debt over the coming years. The Joint Committee on Taxation had pegged the total cost of the bill at $3.8 trillion over the next decade, though other independent analysts have said it could cost much more if temporary provisions in the bill are extended.<\/p>\n
Analysts at Barclays Plc said in a report that they did not expect the Moody\u2019s downgrade to change votes in Congress, trigger forced selling of Treasuries or have much impact on money markets. Treasuries have often rallied after similar actions in the past.<\/p>\n
\u201cCredit downgrades of the US government have lost political significance after S&P downgraded the US in 2011, and there were limited, if any, repercussions,\u201d said Michael McLean, Anshul Pradhan and Samuel Earl of Barclays.<\/p>\n
Around the same time Moody\u2019s was announcing its decision, the US Treasury was reporting China had reduced its holdings of Treasuries in March. While that may further encourage speculation the world\u2019s second largest economy is lowering its exposure to US debt and the dollar, Brad Setser, a former Treasury official, said on X that the data suggested \u201ca move to reduce duration than any real move out of the dollar.\u201d<\/p>\n
Despite the recent trade tensions and worries over fiscal profligacy, the Treasury statistics suggested foreign demand for US government securities remained strong in March, indicating no signs of a revolt against American debt.<\/p>\n
Still, traders will be hard at work early again on Monday, just a week since they had to react quickly to weekend news of an improvement in trade relations between the US and China.<\/p>\n
–With assistance from Greg Ritchie, Matthew Burgess and Michael G. Wilson.<\/p>\n
(Adds early start of trade in US futures)<\/p>\n
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\u00a92025 Bloomberg L.P.<\/p>\n","protected":false},"excerpt":{"rendered":"(Bloomberg) — Investors faced yet another bumpy start to the trading week with US assets coming under fresh…\n","protected":false},"author":2,"featured_media":112931,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5311],"tags":[3662,32,51135,5909,51133,7686,51134,12330,49,978,659],"class_list":{"0":"post-112930","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-united-states","8":"tag-bloomberg","9":"tag-donald-trump","10":"tag-franklin-templeton-investment-solutions","11":"tag-michael-schumacher","12":"tag-moodys-ratings","13":"tag-scott-bessent","14":"tag-sovereign-bond","15":"tag-treasury","16":"tag-united-states","17":"tag-us","18":"tag-usa"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/114531482058147560","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/112930","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=112930"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/112930\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/112931"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=112930"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=112930"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=112930"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}