Moody’s downgrade deepens investor fears over US ‘debt bomb’
NEW YORK – Moody’s Investors Service downgraded the United States’ sovereign credit rating by one notch on Friday (16/5), fuelling investor concerns over Washington’s mounting debt burden, which has surpassed USD 36 trillion, amid ongoing volatility in the bond market and unchecked government spending.
The downgrade coincided with intense debates in Congress over the Republican Party’s sprawling fiscal package, dubbed the “Big Beautiful Bill”, which includes tax cuts, increased spending, and reductions in social safety nets.
“Bond vigilantes will be watching closely to ensure Congress exercises fiscal discipline,” said Carol Schleif of BMO Private Wealth, as quoted by Reuters on Monday (19/5).
The non-partisan Committee for a Responsible Federal Budget estimates that the proposed legislation could add as much as USD 3.3 trillion to the national debt by 2034 — or even USD 5.2 trillion if fully enacted.
In its report, Moody’s criticised successive administrations for failing to reverse the trend of rising deficits and ballooning interest payments.
TD Securities’ head of interest rate strategy, Gennadiy Goldberg, said the downgrade was unlikely to trigger a major sell-off. “But the move has shifted market attention back to fiscal policy and the bills under discussion in Congress,” he said.
Investor concerns were also evident in the rising term premium on 10-year US Treasury yields.
Anthony Woodside of Legal & General Investment Management America noted that markets are “sceptical” of deficit-reduction efforts. The 10-year Treasury yield now hovers around 4.44%, still below levels seen in the early Trump administration.
US Treasury Secretary Scott Bessent reiterated that the government’s priority is to curb rising yields, but also urged Congress to raise the debt ceiling before mid-July. Failure to do so could leave the government without cash — the so-called “X date” — by August.
Republicans support extending tax incentives, though this clashes with demands to cut government spending. Mandatory programmes like social security benefits are considered untouchable.
Morgan Stanley’s Managing Director of Research, Michael Zezas, warned that the deficit will widen without delivering meaningful economic stimulus.
Anne Walsh, Managing Partner at Guggenheim Partners, argued that without a real overhaul of spending, the US fiscal trajectory will not improve. “It’s an unsustainable path,” she stated. (EF/KR/ZH)