U.S. Markets Retreat as Moody’s Debt Downgrade Sparks Risk Repricing

Wall Street opened the week under pressure after Moody’s Investors Service stripped the United States of its last remaining triple-A credit rating, a symbolic move that still managed to ripple through equity and bond markets.

As of 9:34 AM ET, the Dow Jones Industrial Average fell 236 points, or 0.55%, to 42,418.5. The tech-heavy Nasdaq dropped 252 points, or 1.31%, to 18,995.71, while the S&P 500 lost 56.54 points, down 0.95%, to 5,901.84. The Russell 2000, a key gauge of smaller companies, shed 2.73 points, or 1.30%, to 207.12.

The selling was widespread and immediate, with futures already pricing in a rocky open following the Sunday evening downgrade by Moody’s. The agency cut the long-term issuer and senior unsecured ratings of the U.S. government one notch to Aa1 from Aaa, citing a "structural fiscal deterioration" and an unsustainable debt trajectory.

“Persistent, large fiscal deficits will drive the government’s debt and interest burden higher,” Moody’s warned, forecasting that debt will climb to 134% of GDP by 2035, up from 98% in 2024.

Investors were not blindsided. The downgrade had been widely expected following similar moves by S&P in 2011 and Fitch in 2023. But the timing added fresh weight: it came just as the House Budget Committee advanced a reconciliation bill that would extend the 2017 tax cuts and significantly widen the federal deficit in the coming decade.

“The downgrade chips away at a reputation built over decades,” Deutsche Bank analysts noted. “This is a major symbolic move as Moody’s were the last of the major rating agencies to have the U.S. at the top rating."

In bond markets, the impact was swift. The yield on the 30-year Treasury climbed 12 basis points to 5.01%, and the 10-year yield rose to 4.54%, signaling tighter financial conditions and heightened risk premiums. Higher yields translate into more expensive borrowing for households and businesses, potentially squeezing growth.

These developments triggered a repricing of risk in equities. Technology shares, sensitive to interest rate expectations and broader macroeconomic sentiment, led the declines on the Nasdaq. The S&P 500, a benchmark for the broader market, also came under pressure as institutional investors adjusted portfolios to reflect higher expected long-term borrowing costs.

While the downgrade may not materially alter demand for U.S. Treasuries in the short term—given the dollar’s dominant reserve status and the depth of American capital markets—it does cast a long shadow over fiscal policy. As Moody’s put it, the current proposals in Congress are unlikely to “result in material multi-year reductions in mandatory spending and deficits”.

The political dimension also complicates the outlook. The downgrade arrives amid fresh legislative efforts that would, according to critics, worsen the fiscal trajectory. That includes trillions in proposed tax extensions and new outlays, which could face heightened scrutiny in the Senate and from foreign creditors holding nearly $8 trillion in U.S. debt.

Still, not all officials were convinced the move holds great practical weight. Treasury Secretary Scott Bessent dismissed Moody’s as a “lagging indicator,” arguing that the fundamentals of U.S. creditworthiness remain intact.

But economists warned against complacency. “The message from Moody’s is clear: tax cuts and tariff revenues won’t offset the long-term cost of unfunded commitments,” said Bank of America’s Aditya Bhave.

For equity markets, the broader concern lies in whether the downgrade is a one-off reaction or the start of a sustained repricing of U.S. sovereign risk. With interest payments projected to consume 30% of federal revenue by 2035—up from just 9% in 2021—the margin for fiscal maneuver is rapidly narrowing.

As the trading week unfolds, attention will likely remain focused on Washington, where the political response to the downgrade could dictate the next move for markets. Whether lawmakers adjust course—or double down—will influence not only the trajectory of U.S. debt, but the willingness of markets to finance it.Wall Street opened the week under pressure after Moody’s Investors Service stripped the United States of its last remaining triple-A credit rating, a symbolic move that still managed to ripple through equity and bond markets.