Moody's downgrade of US credit rating and its implications; all you need to know

In a historic event, the US government debt was downgraded by the ratings agency Moody's from AAA to AA1. This was the first of its kind downgrade of US debt by Moody's in history, underscoring the importance of this downgrade. The outlook for the US government debt shifted on account of mounting debt at an alarming rate. The downgrade means losing confidence in the US credit and risks of the US not fulfilling its obligations. Some see this downgrade as symbolic, considering the bondholders already know the situation of the US debt.

Diminishing confidence in the US economy

The rating agencies track and introspect each aspect of the underlying asset and its ability to service the debt. The latest ratings revision by Moody's indicates the US government's inability to service the mounting debt. The report highlights that the debt-to-GDP ratio could jump to 134% by 2035 from 98% in 2024. The rising debt levels is expected to have spillover effects on the economy with rising inflation via increased government spending and rising deficits.

Rising borrowing cost

The ratings downgrade of the underlying debt also increases the risk of default and thereby increases the cost of borrowing as well. The US currently has nearly $500 billion in interest payments annually, with rising debt levels and increasing borrowing costs, it is expected to cross $1 trillion by 2030. The Moody’s reports also highlight that the interest payment could consume 30% of the US federal revenue in 2035, from currently 18% in 2024.

Losses in the portfolio for US debt holders

The downgrade has led to a sharp spike in the US bond yields on all tenors. The US 10Y bond yield currently stands at 4.56%, up by 1.8%, and US 30Y bond yields crossed the 5% mark, indicating that the risks remain long-term for mounting US debt. This spike in yields piles on to losses for current holders of US debt making it unattractive for holding. Experts believe that rising yields could unnerve bondholders and trigger the selling of bonds. The Government of Japan holds the highest amount of US debt, worth approximately of $1.15 trillion, accounting for 14% of the total foreign-held held debt.

Does this indicate a big crisis on the horizon?

The immediate impact of the downgrade shows increased cautiousness among investors. However, some see this as a lagging indicator as well. The spending cuts by the Trump administration are aimed at addressing the levels of high government debt, and the impact of those is expected to be visible in lthe ong term. Secondly, the AA1 still holds the outlook as ‘Stable’.