The credit rating agency Moody’s has downgraded the United States’ long-term credit rating from the highest level of AAA to AA1, marking a symbolic yet significant moment in financial history. With this move, the U.S. has now lost its final top-tier rating among the “Big Three” agencies. Standard & Poor’s made the cut in 2011, Fitch followed in 2023, and now Moody’s has completed the trilogy, signaling a clear erosion of global confidence in America’s fiscal path. So what does this mean for Wall Street and investors around the world?
A Downgrade Long in the Making
The move was not unexpected. Moody’s had already shifted its outlook for the U.S. from stable to negative back in November 2023. This recent downgrade confirms growing concerns. The agency explained that America’s strong economic fundamentals no longer outweigh its weakening fiscal metrics. The blame falls squarely on successive administrations and Congress, with Moody’s citing a lack of meaningful fiscal reform and a persistent policy of expanding budget deficits.
Market Reactions: Calm on the Surface
Markets reacted with relative calm. The S&P 500 posted modest gains on the day of the announcement, extending a six-session winning streak. The yield on 10-year U.S. Treasuries initially rose to 4.49%, before easing slightly to 4.46%. The Trump administration criticized the downgrade, suggesting it was politically motivated.
But facts are facts: the U.S. federal budget deficit is nearing $2 trillion annually, or over 6% of GDP. Public debt has already surpassed 100% of GDP, and high interest rates are driving up debt servicing costs. Projections are grim—by 2029, U.S. debt is expected to hit 107% of GDP, and the annual deficit could reach 9% of GDP by the mid-2030s. Even with strong political will, this would be an almost unmanageable burden.
The Real Risk: Rising Yields
Moody’s expects U.S. bond yields to remain in the 4–5% range for the foreseeable future, placing further strain on the federal budget. For years, global markets trusted in the resilience of the U.S. economy and the Federal Reserve. But this downgrade reflects a waning confidence in U.S. creditworthiness—and the implications extend globally. As U.S. Treasuries serve as the global benchmark, rising yields could drive up borrowing costs for other countries as well.
What’s most concerning is that these massive deficits are occurring in relatively stable times. The situation could worsen significantly in the face of escalating geopolitical tensions. This isn’t just America’s problem—many other countries, including Poland, are grappling with similar challenges. Despite economic growth, public debt is not declining. As the article notes, we are learning to live with debt and deficits as the “new normal.”
Tariffs, Tax Cuts, and Budget Games
Moody’s also pointed to the extension of the 2017 tax cuts—still pending in Congress—as a major risk to fiscal sustainability. Interestingly, the agency did not account for the role of tariffs, which act like a consumption tax and support revenue growth. While tariffs can suppress economic growth and increase the risk of recession, they do offer some short-term budgetary relief—a trade-off the market may understand better than credit rating agencies.
A Shift in Fiscal Regime
In truth, this downgrade simply confirms what markets already know: the U.S. has entered a new fiscal regime. The era of relentless fiscal stimulus, which lasted for 27 years, effectively ended in 2023. Since then, the country has shifted toward belt-tightening, tariffs, and spending limits. Meanwhile, net interest on the national debt has quietly surged to 18% of total tax revenues, well above historical norms.
Balancing the budget is now a formidable challenge—far more difficult than political rhetoric often suggests. For investors, the key is to monitor Treasury yields and fiscal policy changes closely, while maintaining a disciplined, long-term investment strategy.
Debt Can’t Last Forever
While the world may seem accustomed to America’s ballooning debt, economic reality sets limits. No economy can run on borrowed time indefinitely. Eventually, the bill will come due. Whether that reckoning arrives sooner or later remains an open question—but one all investors should keep in mind.
Author: Paweł Majtkowski, Analyst at eToro Poland
Source: ManagerPlus
