Moody’s Downgrade Sends Stocks, Treasury Yields, and Gold Tumbling

A few days ago, Moody’s downgraded the US sovereign credit rating from Aaa to Aa1, which marked the first time in over a century that the US no longer holds a top-tier rating from any major credit agency. Driven by escalating national debt and persistent fiscal deficits, the decision has sent ripples through global financial markets, particularly in the United States.

For instance, US stock futures declined sharply following the downgrade, with futures tied to the Dow Jones Industrial Average falling by 0.79%, the S&P 500 dipping 0.97%, and the Nasdaq 100 dropping 1.19%.

The bond market was hit as well, where the yield on the 30-year US Treasury bond surged to 5.03%. This is the highest level since November 2023, indicating increased borrowing costs for the government.

Surprisingly, gold wasn’t spared either, with prices crashing by more than 2% on Friday. However, it started to recover a bit, considering that the price rose more than 1% today. Being the well-known safe-haven likely helped gold with the recovery, in combination with the weaker dollar.

But why did this all happen? According to Moody’s, there are several reasons, with rising debt levels being among the top ones. Namely, the US national debt has reached $36 trillion, with projections indicating a debt-to-GDP ratio will escalate from 98% in 2024 to 134% within a decade.

Continuous budget deficits without substantial fiscal reforms have raised concerns about the government’s financial stability, while political divisions have hindered the implementation of measures to address the growing debt. In other words, the government’s ability to respond to economic challenges is inadequate.

Almost at the same time, new US Treasury data revealed that in March, China’s holdings of US Treasury bonds decreased, marking the first time this century that the UK held a larger share of US bonds than China.

This might add some additional concern for the US, especially taking into account that this occurred only a few weeks after the April market upheaval, which included a significant Treasury selloff alongside drops in stock, bond, and dollar values.

Some in the US downplayed the situation, like the US Treasury Secretary Scott Bessent. He labeled Moody’s as a lagging indicator, saying that the current economic situation is due to Biden’s administration policies.

Still, while the immediate market reactions have been notable, the long-term effects of the downgrade remain uncertain, and we’ll probably have a clearer picture in the near future.