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Moody’s Ratings has downgraded the credit rating of the United States. But what exactly does that mean? And how might it affect Treasury investments?
Why did Moody’s downgrade the credit rating?
Moody’s Ratings downgraded the U.S. credit rating on May 16 from Aaa, the highest rating, to Aa1. This moves the rating down one notch on the agency’s 21-notch scale.
Moody’s decision reflects concerns about how the nation has managed its finances over the past decade and its expectation that government debt and interest rates will continue to grow.
“The U.S. government has been spending more while bringing in fewer tax revenues, and the situation has reached a tipping point where Moody’s believes U.S. economic strengths no longer outweigh these weaknesses,” says Elizabeth Renter, SS’s senior economist.
What does a credit rating downgrade mean?
A credit rating downgrade essentially means that government debt, including bonds and securities, is viewed as becoming riskier. But that doesn’t mean there’s cause for panic.
“The downgrade is really the smallest downgrade possible, though, in part because of our strong economy overall,” Renter says.
Rating changes are nothing new, adds Daniel Masuda Lehrman, a certified financial planner and founder of Masuda Lehrman Wealth in Honolulu, Hawaii.
“Moody’s is actually the last major credit rating agency to downgrade the U.S, after S&P did so in 2011 and Fitch in 2023,” Lehrman said in an email interview.
What’s happening now?
Following Moody’s rating change, Treasury security yields, or interest rates, have risen and prices have gone down. Treasury prices and yields typically move in opposite directions — when interest rates go up, investors often chase that higher yield, which makes previously issued bonds with lower fixed yields less valuable.
“The market has seen a mild sell-off of Treasurys, which has increased yields, particularly for longer-term Treasurys,” Lehrman said.
What does this mean for Treasury investments?
Moody’s credit rating hasn’t fallen far, and Treasury securities are still liquid, meaning they’re generally easy to convert to cash.
Lehrman said that investors can make sure they aren’t overexposed to Treasurys with long maturity dates, as these tend to be more volatile.
Shorter term investments, like T-bills, may not see much impact.
“New investors might benefit from higher yields going forward,” Lehrman added. “Despite the downgrade, the overall consensus is that Treasurys are safe thanks to their liquidity and the dollar’s status.”