Subtle moments, Moody's downgrade! Opening on Monday, the United States has seen a three-time

Source: Wall Street News

After Moody's downgraded the rating of the United States, the US market suffered a triple whammy in stocks, bonds, and the exchange rate.

After the close of the US stock market last Friday, Moody's Ratings announced that it had downgraded the credit rating of the United States from the highest - level Aaa to Aa1. After this downgrade, the United States, the world's largest economy, has been downgraded below the highest rating of AAA by all three major rating agencies.

During the early trading session in Asia on Monday, this news triggered a new round of selling of US assets. US stock futures, US bond futures, and the US dollar index weakened simultaneously. In particular, the yield on the 30 - year US Treasury bond has approached the 5% mark, reaching a new high since the middle of 2007.

The reason given by Moody's for the downgrade directly points to the growing budget deficit of the United States. The agency expects the federal deficit to expand from 6.4% of GDP in 2024 to nearly 9% in 2035, mainly driven by the increase in debt interest payments, the rise in welfare spending, and relatively low taxes.

The timing of this downgrade by Moody's is particularly sensitive because earlier on the same day, due to the obstruction of hard - line Republicans within the US House Budget Committee, Trump's large - scale tax reform plan failed to pass.

According to the estimate of the Joint Tax Committee, the total cost of this tax reform plan in the next ten years is $3.8 trillion. Other independent analysts believe that if the temporary provisions in the bill are extended, the cost may be even higher.

**US Bond Yields Soar, and Confidence in the US Dollar is Eroding**

On Monday, the futures of the three major US stock indexes collectively declined. The Dow Jones Industrial Average futures fell 0.66%, the S&P 500 Index futures fell 0.69%, and the Nasdaq 100 Index futures fell 0.75%.

The yields on US bonds almost all rose. Among them, the yield on the 30 - year US Treasury bond once soared 10 basis points, enough to push it above 5%, reaching the highest level since the middle of 2007, the same as the peak level in November 2023.

Last Friday, the yield on the 10 - year US Treasury bond rose to 4.49% under the condition of low trading volume. The rise in these yields will not only increase the debt - repayment burden of the US government but also threaten to undermine the real economy by driving up the interest rates of mortgages, credit cards, and other loans.

As of the time of writing, the 30 - year US Treasury bond yield has increased by 6.7bp during the day, reporting 4.965%.

Michael Schumacher and Angelo Manolatos, strategists at Wells Fargo, predict that "the yields on the 10 - year and 30 - year US Treasury bonds are expected to rise another 5 - 10 basis points due to Moody's downgrade."

Generally speaking, the rise in bond yields usually boosts the currency assets of the country. However, due to the huge debt problem of the United States, the confidence in US dollar assets is collapsing. Data shows that the Bloomberg US Dollar Index has approached the low point in April, and the sentiment of options traders is the most negative in five years.

Christine Lagarde, the president of the European Central Bank, said in an interview with the media on Saturday that although the recent depreciation of the US dollar against the euro is counter - intuitive, it reflects "the uncertainty and loss of confidence in US policies in some areas of the financial market."

**The Sentiment of "Selling off the US" May Return**

In April this year, the US market suffered overall pressure due to Trump's tariff policies, which forced investors to re - evaluate the core position of US assets in their portfolios.

With the recent easing of the trade situation, some of the selling - off sentiment has been alleviated, and investors' focus in the bond market has quickly shifted to the fiscal trajectory of the United States. Moody's downgrade of the US rating undoubtedly puts pressure on US dollar assets again.

Max Gokhman, the deputy chief investment officer of Franklin Templeton Investment Solutions, said that "in the face of continuous generous and unfunded fiscal spending, the downgrade of the US Treasury bond rating is not surprising, and this trend will only accelerate further."

"As large - scale investors (including sovereign and institutional investors) gradually replace US bonds with other safe - haven assets, the debt - repayment cost will continue to rise. Unfortunately, this may create a dangerous bear - market steepening spiral for US yields, further exerting downward pressure on the US dollar and reducing the attractiveness of US stocks."

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