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Moody’s has stripped the US of its top-notch triple-A credit rating as it warned about rising levels of government debt and a widening budget deficit in the world’s biggest economy.
The agency on Friday afternoon cut its credit rating on the US by one notch to Aa1 from Aaa, while its outlook was changed to stable from negative. Fitch and S&P, the other main agencies, had previously removed the US’s pristine rating.
Moody’s move comes as investors are growing increasingly concerned about the US’s fiscal trajectory. Donald Trump’s Republican party is pursuing a budget bill that is widely expected to increase debt significantly over the next decade.
“While we recognise the US’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s said on Friday afternoon.
Moody’s said it expected federal deficits to widen to almost 9 per cent of GDP by 2035, up from 6.4 per cent last year, owing to increased interest payments on debt, entitlement spending and “relatively low revenue generation”.
“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” the agency wrote.
Yields on US government bonds rose in response to the news, with the benchmark 10-year Treasury yield up 0.03 percentage points after the announcement to 4.48 per cent. The rise in yield represents a fall in price.
“The biggest problem out there now is not the tariffs, it is the lack of progress on deficit talks in DC,” said Andy Brenner, head of NatAlliance Securities, adding that the downgrade was “putting pressure on Treasuries”.
The Republican budget and tax bill failed to pass in the House of Representatives on Friday after a faction of Trump’s party in Congress argued that the legislation would add too much to the federal deficit.
The deficit stands at 6.4 per cent, well above levels economists believe is sustainable long term. The Committee for a Responsible Federal Budget projects that the tax bill could add up to $5.2tn to the national debt over 10 years.