Moneycontrol Pro Panorama | Moody’s Downgrade of the US: Will It Really Shake Market Sentiment?

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The United States is navigating a precarious fiscal landscape, marked by ballooning debt and the looming impact of proposed tax cuts under former President Donald Trump. Reflecting these mounting pressures, Moody’s Ratings has downgraded the US government’s credit rating from AAA to Aa1 — a move that brings its stance in line with that of its peers.

Market reaction to the downgrade was swift, but largely contained. Global equity indices fell, and US Treasury yields climbed on Monday. The 10-year benchmark bond yield rose by three basis points to around 4.50 percent, while the 30-year bond yield edged up four basis points to 4.99 percent. These levels bring yields dangerously close to the 5 percent mark, a level last seen in 2023, when rates touched 5.18 percent — the highest since 2007.

Despite the initial tremor, analysts expect the market reaction to remain subdued. Treasury Secretary Scott Bessent reflected this sentiment in an NBC interview, describing Moody’s move as that of a "lagging indicator" — a common critique of credit rating agencies among market participants.

His remarks carry added weight given Moody’s historical stance. Among the "Big Three" rating agencies, Moody’s has been the most conservative in downgrading US sovereign debt. Standard & Poor’s stripped the US of its top-tier rating in 2011, while Fitch followed in 2023. Thus, Moody’s decision is seen less as a market-altering verdict and more as a delayed acknowledgment of fiscal risks already priced in by investors.

Still, Moody’s outlook for the long term is concerning. It forecasts US federal deficits to widen significantly — from 6.4 percent of GDP in 2024 to nearly 9 percent by 2035. This projected deterioration is driven by rising interest costs, increased spending on entitlements, and only modest improvements in revenue generation.

For investors, however, the downgrade is unlikely to alter the near-term narrative. Markets are more attuned to developments in US-China trade relations and tariff negotiations. Had Moody’s announcement coincided with heightened trade tensions, its effect could have been more disruptive. But with diplomatic channels currently open and trade frictions somewhat eased, markets appear resilient enough to digest the downgrade and move forward.