Bold beard
NEW YORK (Reuters) - Moody's downgrade of U.S. sovereignty has left investors worried about an imminent debt bomb that could spur bond market alerts who want to see more fiscal restrictions from Washington.
Rating agencies lowered the original sovereign credit rating of the U.S. on Friday, the last major rating agency to downgrade the country, citing concerns over the country's $36 trillion debt pile.
The move comes as Republicans who control the House and the Senate seek to approve a package of tax breaks, hiking and reducing safety nets, which could add trillions of dollars to U.S. debt piles. Even if optimism about trade has emerged, the uncertainty of the final shape of the so-called "big bills" puts investors on the edge. Even as U.S. President Donald Trump calls for solidarity around legislation, the bill failed to clear key obstacles on Friday.
"The bond market is particularly focused on the development of Washington this year," said Carol Schleif, chief market strategist at BMO Private Wealth. He said Moody's downgrade could make investors more cautious.
"When Congress debates the 'big and beautiful bill' with bond vigilants will be keenly focused on a line of responsibility on their toes," she said.
Spencer Hakimian, founder of Tolou Capital Management in New York, said Moody's downgrade follows similar moves from Fitch in 2023 and Standard & Poor in 2011, "will eventually lead to higher borrowing costs in the U.S. public and private sectors."
Even so, even so, most funds revised their guidelines after the downgrade of S&P, and even so, lowered ratings are unlikely to trigger forced sales of funds that can only invest in the highest securities, said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities. "But we hope it will focus the market on fiscal policy and the bills currently negotiated in Congress," Goldberg said.
Focus on Bill
Scott Clemons, chief investment strategist at Brown Brothers Harriman, said how much Congress will weaken fiscal principles or whether it sacrifices fiscal principles.
The federal budget committee in charge is a nonpartisan think tank, and the bill is estimated to increase debt by about $33 trillion between 2034 and 2034, which could increase to $5.2 trillion if policymakers expand interim provisions.
Moody's said on Friday's continuous administration that it failed to reverse the trend of higher fiscal deficits and interest costs, and that it does not believe that the fiscal proposal being considered would result in a significant reduction in the deficit reduction.
Worry about being in the market pricing. Anthony Woodside, head of fixed income strategy at Legal & Permal Investment America, said the metric of the treasury term premiums for the last 10 years, a measure of investors' risk of holding long-term debt, is a sign of basic fiscal concerns in the market. Woodside said the market “has not given much credibility to materially reduce deficits.
Finance Minister Scott Bessent said the government is focused on a benchmark yield that includes 10 years. The highest yield was 4.44%, about 17 basis points lower than Trump's basis point before taking office in January.
"Of course, you can see that when we've already had a considerable deficit, the output of the deficit will increase dramatically," said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions.
A White House spokesman dismissed concerns about the bill. "Experts are wrong, just like the impact of Trump's tariffs, which have generated trillions of dollars in investment, record job growth, no inflation," Harrison Fields, the president and deputy press secretary special assistant, said in a statement.
The White House characterizes moody downgrades to politics. White House Communications Director Steven Cheung responded to the move via social media posts Friday, picking out Moody's economist Mark Zandi and calling him a political opponent of Trump. Zandi, the chief economist at Moody's Analytics, a separate entity with the rating agency, declined to comment.
Some in the market believe that tax plans will improve with tax plans compared to early expectations due to tariff revenue and consumption. Barclays now estimates the bill's cost will increase its deficit by $2 trillion over the next 10 years, compared with an estimate of about $3.8 trillion before Trump took office.
x factor?
Urgency is increasing as the critical cutoff line approaches. House Speaker Mike Johnson said he hopes his chamber passes the bill before the May 26 U.S. Memorial Day holiday, while Bessent urged lawmakers to raise federal debt restrictions by mid-July.
The U.S. government reached its statutory lending limit in January and began taking "extraordinary measures" to prevent it from violating the cap. Bessent said the government could hit the so-called X-tate by August (when it runs out of cash to meet all its obligations).
Investors' tensions about debt limits have begun to emerge. The average yield on the Treasury bills due in August is higher than the yield on the adjacent due bills.
Despite a broad agreement within the Republican Party to expand Trump’s 2017 tax cuts, how to achieve spending cuts help offset the differences in lost revenues.
There is limited maneuvering space to cut expenses. Mandatory spending, including social welfare programs that Trump promised not to touch, accounted for the vast majority of total budget spending last year.
Morgan Stanley strategist Michael Mniceal Wister said in a note released last week that a politically viable fiscal plan could lead to a wider deficit in the near term, while Michael Zezas, a strategist at Morgan Stanley, said in a note released last week that it would not bring meaningful fiscal growth to the economy.
Anne Walsh, chief investment officer of Guggenheim Partner Investment Management, said that in the actual process in Washington, there is a clear level of spending, and meaningful improvements to the U.S. fiscal path is impossible.
“This is an unsustainable course we are doing,” she said.
(Report by Davide Barbuscia; other reports by Carolina Mandl; Editors by Megan Davies and Anna Driver)