Moody's Ratings slashed the United States' credit rating down a notch to Aa1 from the highest triple A on Friday, citing the budgetary burden the government faces amid high interest rates.
"This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns," the ratings agency said in a statement.
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The U.S. is running a massive budget deficit as interest costs for Treasury debt continued to rise due to a combination of higher rates and more debt to finance. The fiscal deficit totaled $1.05 trillion year to date, 13% higher than a year ago. The influx in tariffs helped shave some of the imbalance last month, however.
Moody's had been a holdout in keeping U.S. sovereign debt at the highest credit rating possible, and brings the 116-year-old agency into line with its rivals. Standard & Poor's downgraded the U.S. to AA+ from AAA in August 2011, and Fitch Ratings also cut the U.S. rating to AA+ from AAA, in August 2023.
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The news came as the GOP-led House Budget Committee on Friday rejected a sweeping package for President Donald Trump's agenda that includes extending the 2017 tax cuts.
"Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's said. "We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration."
Moody's officially rated U.S. bonds in 1993 for the first time, but it had assigned a "country ceiling rating" of AAA on the U.S. since 1949.
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The benchmark shot 3 basis points higher in after-hours trading, trading at 4.48%. The iShares 20+ Year Treasury Bond ETF fell about 1% in extended trading, while the SPDR S&P 500 ETF Trust fell 0.4%.
"Treasurys are still dealing with the fundamental factor of less foreign demand for them and the growing size of the pile of debt that needs to be constantly refinanced is not going to change, but it is symbolic in the sense that here's a major rating agency that's calling the out that the U.S. has strained debts and deficits," said Peter Boockvar, chief investment officer at Bleakley Financial Group.
In reaction to Trump's trade battle last month, Treasury yields rose and the dollar weakened against its global counterparts in a sign that investors could be moving away from the U.S. as the safest place to invest.
