Market Bulletin: US Double A, United States Credit Rating Downgraded

Written By: Nate Garrison, CIO, World Investment Advisors 

Moody's Downgrades United States Rating to AA1 from AAA

The credit rating agency Moody’s Ratings (Moody’s) downgraded the credit rating of the United States (US) federal government from Aaa to Aa1 on Friday, May 16, 2025. Per Moody’s, their downgrade reflects “… the increase over more than a decade in [US federal] government debt and interest payment ratios to levels that are significantly higher than similarly rated [governments].” ¹

Moody’s downgrade follows Fitch’s downgrade in August 2023 over expectations of fiscal deterioration from a growing federal
government debt burden and divisive politics impacting good governance. ² Standard & Poor’s (S&P) was the first to downgrade
the US credit rating back in August 2011 over concerns about governance and policy-making following battles in the US Congress over the debt ceiling. ³ Countries including Switzerland, Canada, and Singapore (among eight others) all now have higher credit ratings than the United States government.

Overall, we view the downgrade by Moody’s as a notable headline but not a significant development. That being said, we think the reasons for the downgrade are important and merit attention from investors. Fiscal issues like those Moody’s outlines in their downgrade are worrisome, as the risks from slowing economic growth and rising interest rates increase.

How Did Markets React to the News?

The timing of the announcement on Friday was less than ideal, coinciding with the University of Michigan’s Consumer Sentiment
Index posting its second-lowest reading on record.

Although futures over the weekend pointed to a potentially sharper drop, US equity markets opened modestly lower and were mostly unchanged by the market close on Monday as buyers stepped in as the day progressed. The S&P 500 index fell -0.93% at the market open but closed 0.09% higher.

Bonds experienced some early volatility, as the US Treasury 30-year bond yield briefly surged past 5.0%*, but they also ended mostly flat for the day. Similar to US equities, buyers stepped in as the day progressed, and longer-dated yields (5-30 years) ended only a few basis points higher than they started the day, with all yields below the 5% level.

*The 5% yield level is psychologically important to some in the markets and media, but it is otherwise not necessarily a significant number.

How Does the Downgrade Impact the Economy and Markets?

We do not view the United States as a riskier borrower due to the downgrade. Much of what Moody’s addressed in their downgrade is not news. The high and growing level of the federal debt is widely known and discussed by market participants, government and elected officials, and the media; as mentioned, the two other major credit agencies had previously downgraded the United States’ credit rating for similar reasons. The downgrade will likely weigh more on market and consumer sentiment rather than triggering any significant forced selling. 

We do agree with Moody’s, however, and think there are very real economic and fiscal risks facing the United States. Some (but not all) of those risks may include:

1. Tariffs putting downward pressure on consumer spending and business profits, hurting GDP growth.
2. Policy uncertainty around trade putting downward pressure on business investment and hiring, further hurting GDP growth.
3. Tax changes by Congress slashing federal revenues more than reducing spending, thereby increasing deficit spending and the federal debt.
4. Interest rates rising as bond markets react to the prospect of rising deficits and debts, further increasing deficit spending and the federal debt.
5. Rising interest rates increase consumer and business borrowing costs, hurting GDP growth.

A combination of these and other economic and fiscal risks being realized could lead to the worrisome scenario where the cost of the federal debt is increasing rapidly while the US economy is increasingly less able to “pay” for it through GDP growth. That could lead to even more (severe) fiscal challenges over time.

While this is not a desirable scenario, we think the likelihood of the United States becoming unable to repay its debts is currently extremely low for a few reasons, including:

1. The The US dollar is the preeminent global reserve currency, providing the United States with an extraordinary ability to finance its spending through US Treasury purchases by both domestic and foreign investors.
2. The United States has a massively large and incredibly dynamic economy that has consistently found new ways to innovate and grow over its history, and we expect that to continue over the long run. Growth will help ease (but not eliminate) the debt burden.
3. Americans are among the wealthiest people and businesses in the world, and they could financially support a more balanced budget through a higher tax load (the political will to do this is a different question).
4. The United States prints its own currency and could always “print” money to pay its debt at face value (though this could have a different set of repercussions, like runaway inflation and diminished status as a reserve currency).

We acknowledge that the United States is faced with the ever-lingering political risk of a “technical default” if elected officials in Congress do not raise the federal debt ceiling in a timely manner. However, we view this more as an issue of “willingness to pay,” rather than “ability to pay.” As long as Congress does not cause a technical default, then the United States has ample capacity to repay all its debts in full.

So, while the downgrade is notable and newsworthy, we think the outcomes of trade negotiations, tax policy changes, and foreign policy developments will have much greater impact on the outlook for the economy and markets going forward.

The WIA Investment Team will continue to monitor policy, markets, and the economy, and provide you updates and our analysis in the weeks and months to come.

For assistance with your workplace retirement plan, please schedule a call with the SMARTMap Financial Advocate team here. 

Sources:
1. Moody's Ratings. "Moody's Ratings downgrades United States ratings to Aa1 from Aaa; changes outlook to stable", 16 May 2025, https://ratings.moodys.com/ratings-news/443154.
2. Fitch Ratings. "Fitch downgrades United States long-term ratings to AA+ from AAA; Outlook stable." Fitch Ratings, 1 Aug. 2023, https://www.fitchratings.com/research/sovereigns/fitch-downgrades-united-states-long-term-ratings-to-aa-from-aaa-outlook-stable-01-08-2023.
3. S&P Global Ratings. "S&P Global Ratings Disclosure." S&P Global, 2025, 05 August 2011, https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/6802837.
4. U.S. Department of the Treasury. "Daily Treasury Yield Curve Rates." U.S. Treasury, 2025, 19 May 2025, https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2025.