News

Years of rising deficits and budget chaos finally caught up with the U.S. credit rating Friday when Moody’s Investor Service downgraded the government, stripping its last triple-A rating.

Moody’s, in a news release after the market close, said it had cut the U.S. rating by one notch, to Aa1 from Aaa, and that the move “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.”

Moody’s MCO was the last of the major credit-rating firms to strip the U.S. of a triple-A rating.

Investors appeared to doubt the move would have much lasting market impact, but were braced for a near-term reaction.

“We don’t think this is a game changer but does provide an excuse for investors to take a little bit of profits,” Keith Lerner, chief market strategist at Truist, told MarketWatch in an email.

The move does, however, highlight the potential rise in deficits and will put more focus on discussions around the extension of the 2017 tax bill, he said.

“While this is historic and will attract media attention, its market impact is likely to be contained,” said Mohamed El-Erian, chief economic advisor at Allianz, in a post on X .

In August 2011, S&P Global Ratings SPGI was the first to take away a triple-A rating from the U.S. amid a debt-limit showdown — something that has since become a frequent occurrence in Washington. The move set off political shock waves, coming amid a late-summer stock-market selloff tied to the fiscal showdown and a worsening eurozone debt crisis. Treasurys, however, rallied after the S&P downgrade, pulling down yields due to worries over growth.

Fitch Ratings was next in August 2023, with the move coming shortly after the resolution of another debt-limit battle.

The Moody’s decision may stir memories of the earlier market reaction, said Andy Constan, chief executive of Damped Spring Advisors, in a post on X.

“Hard to say if it matters. Its not good news.” Investors may recall the 2011 selloff and “think this rhymes,” he added.

The decision by Moody’s shouldn’t come as much of a surprise. The company in November 2023 cut its outlook on the U.S. credit rating to negative from stable, a move that’s often a precursor to a downgrade.

Investors have been weighing the potential consequences of the U.S. losing its last triple-A rating ever since.

On Friday, Moody’s said successive U.S. administrations and Congress have failed to agree on measures to reverse a trend of large annual fiscal deficits and growing interest costs, adding that it doesn’t believe that current fiscal proposals under consideration will result in significant multiyear reductions in mandatory spending and deficits.

Moody’s said mandatory spending, including interest expense, is projected to rise to around 78% of total U.S. spending by 2035, from around 73% in 2024. If the 2017 Tax Cuts and Jobs Act is extended, which is the firm’s base-case scenario, it would add around $4 trillion to the federal fiscal primary deficit, which excludes interest payments, over the next decade, Moody’s said.

The downgrade comes on the same day the House Budget Committee failed to advance a sweeping tax and spending bill that is the centerpiece of President Donald Trump’s legislative agenda, underscoring deep divisions within the Republican caucus.

“Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher,” Moody’s said. It expects U.S. fiscal performance to deteriorate “relative to its own past and compared with other highly rated sovereigns.”

Moody’s said that while Treasury assets remain in high demand, higher yields since 2021 have raised the interest burden on U.S. debt — with interest payments set absorb around 30% of revenue by 2035, versus 18% in 2024 and 9% in 2021.

“While we recognize the U.S.’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s said.