US Treasuries Tumble After Moody's Downgrade to Aa1, 30-Year Yield Reaches 5% for First Time in 2023

Moody's Ratings downgraded the US government's credit rating to Aa1 from Aaa, citing a ballooning budget deficit. This move pushed 30-year Treasury yields to 5% and US equity futures slid. Investors are concerned about the US sovereign bond market as Capitol Hill debates unfunded tax cuts and the economy slows.

Moody's Ratings has downgraded the U.S. government's credit rating to Aa1 from Aaa, citing a ballooning budget deficit that shows little sign of narrowing. This move has pushed 30-year Treasury yields to 5%, the highest level since 2023, and US equity futures slid on Monday. Investors are concerned about the US sovereign bond market as Capitol Hill debates unfunded tax cuts and the economy slows.

The downgrade comes as the federal budget deficit is running near $2 trillion a year, or more than 6% of gross domestic product. Moody's expects federal deficits to widen, reaching nearly 9% of GDP by 2035, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation. Despite such sums, lawmakers will likely continue work on a massive tax-and-spending bill that's expected to add trillions to the federal debt over the coming years.

"The downgrade isn't altogether surprising," said Lawrence Gillum, chief fixed income strategist at LPL Financial. "But now that the US has officially lost the last of its AAA/Aaa ratings from the main three rating agencies, we hope Congress and the Trump administration take this action seriously and reign in deficit spending."

Michael McLean, Anshul Pradhan, and Samuel Earl of Barclays said they did not expect the Moody's downgrade to change votes in Congress, trigger forced selling of Treasuries, or have much impact on money markets. Treasuries have often rallied after similar actions in the past.

Despite the recent trade tensions and worries over fiscal profligacy, the Treasury statistics suggested foreign demand for US government securities remained strong in March, indicating no signs of a revolt against American debt.

References:
[1] https://finance.yahoo.com/news/investors-await-another-monday-jolt-145946996.html
[2] https://www.marketscreener.com/news/latest/INSTANT-VIEW-With-Moody-s-downgrade-US-loses-treasured-Aaa-credit-rating-49985610/