• Sharp reactions in markets and bond yields following downgrades by S&P Global Ratings, Fitch Ratings expected to be seen after Moody's decision

BERLIN/ISTANBUL

The US lost the highest rating from all three major rating agencies as Moody's downgraded its credit rating due to its high debt level and widening budget deficit, which is expected to worsen bond market conditions.

Moody's downgraded the long-term US credit rating from “AAA” to “Aa1” and changed its outlook from “negative” to “stable.”

The downgrade "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 said in a statement.

“The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period. While these institutional arrangements can be tested at times, we expect them to remain strong and resilient," the statement said.

Over the next decade, government revenues are expected to remain broadly flat, and larger deficits are expected, the statement warned.

In the absence of adjustments in taxation and spending, mandatory spending in the US, which accounted for about 73% of total spending in 2024, is projected to rise to about 78% by 2035, including interest expenses, and if the 2017 tax cuts are extended, the deficit will increase by about $4 trillion over the next 10 years.

The annual deficit of the US federal budget is about $2 trillion. This is equivalent to more than 6% of GDP. For the fiscal year that started on October 1, the budget deficit is already $1.05 trillion, 13% higher than the previous year.

 Investors tend to move away from the dollar

With Moody's also downgrading the long-term credit rating of the US from “AAA” to “Aa1,” the country lost the highest rating from all three major credit rating agencies.

The world's largest economy now has a credit rating comparable to smaller economies like Austria and Finland.

The first downgrade of the US occurred in 2011, with the downgrade of S&P Global Ratings, and the markets reacted strongly to this decision. The S&P 500 lost 16% of its value in a short period of time.

After Fitch Ratings downgraded the country's credit rating in 2023, US 10-year bond yields increased from 4.1% to over 5% in three months.

It is stated that a lower credit rating could lead to worse conditions in the bond market for the US.

Experts say a downgrade by Moody's could also lead to higher bond yields, which could raise borrowing costs and suppress economic growth.

In the wake of rising national debt and US President Donald Trump's tariff tensions with China and the rest of the world, investors have become more cautious and are demanding higher yields on US debt.

The US Treasury bond market was already under pressure from expectations of rising debt yields and persistently high inflation.

Higher bond yields could affect borrowing costs for companies and consumers who rely on the bond market, which in turn is expected to negatively impact the economy, which depends on the stock market.

The US 10-year bond yield is currently 4.558%, its highest level since the 2008 global financial crisis. Markets consider the 5% yield on US 10-year bonds to be a critical threshold.

In April, when US Treasury yields approached this level, the US immediately backed down in its trade dispute with the rest of the world and suspended additional tariffs on imports.

As concerns about the bond market grew, the Dollar Index, which compares the US currency to a basket of global currencies, has fallen by 6.5% since the beginning of the year. The euro gained about 8% against the dollar in this period.

It is projected that the trend of international investors moving away from the dollar will accelerate further following the downgrade.

Since Moody's decision was announced after the markets closed, the first concrete reaction is expected to occur when the market opens today.

However, after hours trading on Friday, the S&P 500 ETF fell 1%, while the US 20+ year Treasury bond ETF lost 1%. The ETF tracking the gold price rose 1%.