As the closing bell rang on Friday, triggering the usual exodus of bankers and traders to their watering holes, a bombshell dropped: Moody’s Investors Service has shifted its outlook on the Government of the United States from stable to negative, citing heightened risks to fiscal strength. 

This adjustment comes amid the looming threat of a government shutdown, with funding secured until November 17, and newly elected House Speaker Mike Johnson revealing a Republican government funding plan.

Against the backdrop of higher interest rates, Moody’s is emphasizing the need for effective fiscal policy measures to address large fiscal deficits, warning that, without such measures, debt affordability could significantly weaken. The agency attributes part of the risk to ongoing political polarization in Congress, raising concerns about reaching a consensus on a fiscal plan. Despite the negative outlook, Moody’s expects the US to maintain its exceptional economic strength, suggesting that positive growth surprises could slow the deterioration in debt affordability.

As the government faces potential funding challenges and political gridlock, Moody’s decision aligns with a trend seen in August, when Fitch downgraded the US long-term foreign currency issuer default rating. Moody’s is now the sole major credit company maintaining a top rating on the US, with S&P Global Ratings having stripped the country of its top score in 2011.

The move triggers discussions about the implications for investors and market participants. While the shift by Moody’s signals concerns about fiscal risk, experts note that the downgrade’s impact on banks and institutional investors appears limited, given the established use of US Treasuries as collateral and regulatory assets. The downgrade raises questions about alternatives to Treasuries and prompts consideration of the evolving market dynamics in response to these credit-rating changes.

Despite the criticism and disagreements, the shift by Moody’s serves as a reminder of the rising fiscal risks and challenges facing the United States, contributing to a complex economic landscape as the nation navigates potential disruptions and uncertainties. Following the announcement, Ten-year Treasury note futures experienced a decline, hitting fresh session lows, while the yield on US ten-year Treasuries rebounded to 4.65%, matching the earlier session’s highs.

Monday market outlook: Anticipating a bearish trend amidst rising concerns over US Treasury downgrade

As the markets prepare to open on Monday, a bearish trend is anticipated. It’s crucial to recognize that government deficit spending doesn’t mimic household finances; instead, it generates money in the private sector. While government interest payments are on the rise, the US isn’t facing a binary choice between servicing interest and investing in the real economy. The downgrade of US Treasuries introduces concerns about its impact on various market participants. Despite the rating adjustment, the fundamental attributes of US Treasuries, such as high rating, liquidity, and a robust repo market, remain intact.