The U.S. just lost its last pristine credit rating. What that means for markets.
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.”
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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.