U.S. and Chinese officials signaled progress in trade talks this week. Wall Street stocks rose on the news. Investors hoped tariffs would ease.
However, gains were capped by renewed caution. Moody’s Investors Service downgraded the U.S. credit rating. The move revived risk aversion in global markets.
Moody’s Lowers U.S. Rating to Aa1
On Friday, Moody’s cut its “U.S. Long-Term Issuer and Senior Unsecured Ratings” from Aaa to Aa1. The agency cited rising federal debt and persistent budget deficits.
Moody’s noted that U.S. debt has surged for more than a decade. Federal spending grew even as tax cuts lowered revenue. At the same time, higher interest rates have pushed up the cost of servicing debt.
This downgrade follows similar actions by Moody’s peers. Standard & Poor’s lowered its U.S. rating to AA+ in 2011. Fitch Ratings made the same cut in 2023.
Bond Yields and Currency Shifts
Investors demanded higher yields on U.S. Treasuries after the downgrade. The 10-year yield climbed 5 basis points to 4.48% on Friday. By Monday in Asia, it rose further to 4.51%.
The U.S. dollar also weakened. Safe-haven currencies such as the euro, yen, and Swiss franc gained ground. Traders shifted funds into gold. Gold futures spiked over 1% before settling up 0.8% at $1,213 an ounce in early European hours.
Equity Futures and Asian Markets Slide
U.S. stock index futures fell sharply in Monday’s Asian session. At 4:42 a.m. CEST, Dow futures were down 0.65%. S&P 500 futures fell 0.92%. Nasdaq futures dropped 1.22%.
Asian equities also felt the pressure. Japan’s Nikkei 225 slid 0.66%. Australia’s ASX 200 declined 0.46%. Hong Kong’s Hang Seng eased 0.56%.
European markets opened flat. But analysts warn that the sell-off could spread across the region today.
Moody’s Sees Limited Budget Flexibility
Moody’s warned that U.S. budget flexibility will stay “limited” without policy changes. The agency projects that extending the 2017 Tax Cuts and Jobs Act could add about $4 trillion to deficits over the next decade. By 2035, interest payments might consume 30% of federal revenues, up from 18% in 2024.
Kyle Rodda, senior market analyst at Capital.com, said the downgrade “reflects market risk for U.S. debt.” He added that if economic growth stalls, bond values could suffer.
Short-Term Impact Likely Contained
Despite the jitters, some strategists expect only a brief market impact. Rodda noted the downgrade “is a reminder of loose fiscal policy” but may not have lasting effects.
Investors will watch U.S. debt auctions and any policy response. They will also gauge whether further trade truce news can offset the credit-rating fallout.
