US Fiscal Perspectives: May 2025 US Credit Downgrade Views - Rates Compounding Issue...
Three Strikes: Slow & long slide from being a full AAA Story
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On May 16th 2025, Moody's downgraded US debt from Aaa to Aa1 due to the decade rise in debt and a clear concern over rising interest expense (which we agree is a concern and have been flagging since the Fed has stayed higher for longer).
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This downgrade removes the last coveted AAA rating (but the US was already at AA status after 2 out of 3 downgrades). Yet, this is an important reminder of US fiscal issues ahead.
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In 2011 S&P shocked us, as the downgrade was not priced-in. In 2023, the desire to term out debt (eventually dashed in Oct23 QRA when the Treasury decided to go with more bill issuance) drove rates up in Q3/early Q4 (not the Fitch news per-se).
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This time, unlike 2011 & 2023, USTs are in a better position after UST long-end rates have grinded higher recently. That said, if upcoming tax cuts/debt limit ext. result in a spike in future deficits, rates can grind up (where north of 5% is problematic for the US).
