On May 16, 2025, Moody’s Investors Service downgraded the United States’ long-term credit rating from Aaa to Aa1, marking the final departure of the U.S. from the top-tier rating among the three major credit agencies. This credit downgrade aligns Moody’s with earlier downgrades by S&P in 2011 and Fitch in 2023, reflecting growing concerns over the nation’s fiscal health.
Why Moody’s Downgraded the US
Moody’s cited several factors for the downgrade, including the rising national debt, which has reached $36 trillion, increasing budget deficits, and the lack of substantive fiscal reforms. The agency warned that entitlement spending is projected to rise, while revenues remain stagnant, potentially worsening the U.S.’s fiscal standing compared to other top-rated nations. (Source: Moody’s)
Market Reactions: Bonds and Equities
Bond Markets
Following the downgrade, yields on 10-year Treasury bonds approached 4.5%, indicating that investors may demand higher returns due to increased risk perception. Despite the downgrade, some analysts believe the impact on financial markets will be minimal, as U.S. Treasuries remain secure due to the dollar’s status as the global reserve currency, making default unlikely.
Equity Markets
U.S. stock futures, including Dow Jones, S&P 500, and Nasdaq futures, dropped by 0.7% following the downgrade. This move reflects concerns over America’s deteriorating fiscal health, though it may not immediately impact borrowing costs. Despite this, the stock market had a strong previous week driven by easing U.S. & China trade tensions and renewed optimism in AI investment.
Previous Credit Downgrades
2011: S&P Credit Downgrade
In August 2011, S&P downgraded the U.S. credit rating from AAA to AA+ for the first time in history, citing political brinkmanship over raising the debt ceiling and the lack of a credible plan to reduce the national debt. This led to a significant market reaction, with the Dow Jones Industrial Average dropping 634.76 points (-5.55%) on August 8, 2011, marking the sixth-largest point drop in its history at that time.
2023: Fitch Credit Downgrade
Fitch downgraded the U.S. credit rating in 2023, citing declining governance standards, rising government debt, and deficits. The agency highlighted the erosion of governance, particularly the complex budget and debt limit process, which has become increasingly mired in political partisanship, eroding confidence in fiscal management.
Implications for Investors
While the immediate market reactions to the downgrade have been modest, the long-term implications could include higher borrowing costs for the government and increased scrutiny of U.S. fiscal policies. Investors may adjust their portfolios to account for potential changes in interest rates and bond yields moving forward.
As this downgrade occurred after the market was closed on Friday, the broader market has yet to react. There is a potential that the gains seen last week could be given back due to the credit downgrade, where dependent financial instruments on US credit reflect the change. There is also an idea that markets can continue their streak based on positive earnings season results. Any effect that the downgrade has will be reflected in the market over the coming weeks.