Moody’s Downgrades U.S. Credit Rating Citing $36T Debt, Fiscal Challenges — Evening Brief – 05.19.25 

Moody’s Ratings downgraded the United States’ credit rating from Aaa to Aa1 late on Friday, stripping the country of its last triple-A rating from a major credit agency. The decision, aligning Moody’s with Fitch Ratings (2023) and S&P Global Ratings (2011), reflects deepening concerns over the U.S.’s $36 trillion debt, projected to reach 134% of GDP by 2035, and rising interest payment burdens, which Moody’s notes are significantly higher than those of similarly rated sovereigns.   

While the Aa1 rating remains strong, the loss of triple-A status is a warning of deteriorating fiscal health. It underscores the need for sustainable debt management to avoid further downgrades, which could amplify economic challenges. For now, the U.S. benefits from its economic size and the dollar’s global dominance, but unchecked deficits and debt growth could strain these advantages, impacting everything from government budgets to everyday borrowing costs. 

The agency highlighted that successive U.S. administrations and Congress have failed to address large annual deficits and growing interest costs, projecting federal deficits to rise from 6.4% of GDP in 2024 to nearly 9% by 2035, driven by increased interest payments, rising entitlement spending, and low revenue generation. 

The downgrade coincides with a proposed tax-cut package, estimated to add $3 to $5 trillion to the debt over a decade, intensifying fiscal concerns amid political gridlock. Moody’s noted a stable outlook, citing the U.S. economy’s resilience and the dollar’s global reserve status, but warned of potential increases in borrowing costs for government and consumers. 

Market reactions included a spike in U.S. Treasury yields, with the 30-year briefly exceeding 5% and the 10-year swap spread widening to 54 basis points, although still below its peak of 60 basis points. Equities showed mixed responses, and the dollar strengthened. 

The interplay between U.S. sovereign risk, Treasuries, and the dollar raises questions about potential capital flight, with investors wondering if global portfolios are shifting away from U.S. assets. While data on this trend emerges with a lag, Friday’s U.S. Treasury TIC report for March provided few definitive answers. Foreign investors remained active buyers of U.S. asset markets, with official accounts increasing their U.S. Treasury holdings by $26 billion. 

However, within that broader trend, China reduced its holdings of U.S. Treasuries by $19 billion, signaling potential repositioning. As a result, market participants will closely monitor the upcoming April TIC data, set for release in mid-June, for further insights into global portfolio shifts. Additionally, traders and analysts are watching the $16 billion 20-year U.S. Treasury auction on Wednesday, assessing demand levels amid ongoing fiscal and credit concerns.