(20 May 2025 – United States) Moody’s has downgraded the US credit rating from Aaa to Aa1 because of a growing budget deficit, resulting in a rise in 30-year Treasury yields to five percent.
The downgrade has highlighted concerns about US fiscal policies and management of the growing US$36 trillion US deficit, viewed by experts as a looming debt time-bomb. Moody’s anticipates federal deficits to exceed nine percent of GDP by 2035.
Foreign holdings of US Treasuries jumped to a record high of US$9.05 trillion in March, data from the Treasury Department showed, rising for a third straight month as demand for US government debt remained robust a few months after President Donald Trump took office. That trend could change in April as the Trump administration introduced its massive Liberation Day trade shock that saw effective tariff rates surge, particularly on Chinese goods.
Moody’s is the last of the major ratings agencies to downgrade US credit after S&P downgraded the nation’s credit rating in August 2011 and Fitch lowered its rating on the US by one notch from AAA to AA+ in 2023.
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multiyear reductions in mandatory spending and deficits will result from current fiscal proposals under consideration” Moody’s said.
“Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’s fiscal performance is likely to deteriorate relative to its own past and compared with other highly rated sovereigns.”
“We’ve been through this before. Still, the move highlights the country’s fiscal challenges. The US still maintains its dominance as the safe haven economy of the world, but it puts some chinks in the armour” commented Wells Fargo Investment Institute Head of Global Fixed Income Strategy, Brian Rehling.
“When our credit rating goes down, the expectation is that the cost of borrowing will increase. That’s because when a country represents a bigger credit risk, the creditors will demand to be compensated with higher interest rates” stated Delancey Wealth Management Financial Planner, Ivory Johnson.