To The Moon

The Impact of Moody's Rating Downgrade: Declining Demand in Treasury Bond and Increasing Pressure on Fiscal Policy

Moody's downgraded its rating late Friday.LinksThe downgrade of the U.S. credit rating from Aaa to Aa1 has reignited concerns about the size of the U.S. budget deficit, even as a bill to further widen the deficit is being considered by various houses of Capitol Hill.

As investors await the final form of the bill,Wells Fargo BankThe Wells Fargo Investment Institute (WFII) released a note covering what it believes are the main takeaways for investors from the downgrade.

First, the Wells Fargo Investment Institute research team, led by bond analyst Jon North, was quick to point out that Moody’s took the action, citing a “failure to increase revenue or structurally cut spending” and a “continued rise in the ratio of government debt and interest payments,” to bring its rating in line with the other two major rating agencies — S&P and Fitch — which downgraded the U.S. sovereign credit rating in 2011 and 2023, respectively.

The WFII expects the downgrade to have little impact on markets, saying "the risk of a fiscal crisis appears low," but it added that upward pressure on Treasury Bond yields, which serve as a benchmark for most U.S. borrowing, "could also raise interest rates on consumer loans, including mortgages and credit cards, with implications for households and businesses."

Other adverse effects of the rating downgrade include a decline in global preference for U.S. Treasury Bond. WFII stated, "While demand for Treasury Bond is likely to remain strong, we believe that the decline in foreign appetite following President Trump's announcement of tariffs—which is already clear—could exacerbate fiscal pressures."

"Politically, a downgrade could be seen as a setback for the Trump administration, thereby intensifying the debate over fiscal policy," North and his team wrote.

As guidance to fixed income investors, WFII prefers medium-term notes (3 to 7-year notes), which it believes will "provide attractive yields and reduce maturity risk exposure."

(Stephen Culp)

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