WASHINGTON — Yields on United States (US) government bonds surged sharply to their highest levels since November 2023, following a formal downgrade of the US long-term credit rating by ratings agency Moody’s on Friday (17/5).

The yield on the 30-year bond briefly hit 5.03% before retreating to 4.921%, up 2 basis points. Meanwhile, the 10-year yield also rose 2 basis points to 4.459%, while the 2-year yield edged down slightly to 3.972%. For reference, 1 basis point equals 0.01%, and bond yields move inversely to prices.

This increase came shortly after Moody’s downgraded the US credit rating from Aaa (the highest) to Aa1, amid concerns over the government’s debt burden and the rising cost of interest payments driven by persistently high interest rates.

“This one-notch downgrade reflects a more than decade-long rise in the US government’s debt and interest payment ratios to levels significantly higher than those of other similarly rated countries,” said Moody’s in an official statement, as quoted by CNBC.

It marks the first time since 1949 that Moody’s has downgraded the US “country ceiling rating” from Aaa, following similar actions by other major agencies such as Fitch and S&P.

Analysts at Deutsche Bank described Moody’s move as symbolic but important, as it was the only major agency that had still maintained the top rating for the US.

As the trading session progressed, investors began to resume bond purchases, slightly easing the earlier spike in yields. However, markets remain clouded by long-term concerns over the US fiscal outlook.

The situation has become more complex as the Republican-controlled House of Representatives pushes for Trump-era tax and spending legislation, which is expected to add trillions of dollars to the federal deficit.

Moody’s also highlighted the lack of fiscal discipline in the US. “The US administration and Congress have repeatedly failed to reach agreements to reverse the trend of large annual fiscal deficits and rising interest costs,” said the agency.

It is worth noting that after Trump ignited a trade war, the yield on 10-year US government bonds surged to 4.45%, the highest level since January. The spike in US bond yields was believed to have forced Trump to delay a 90-day tariff hike on around 70 countries.

However, Trump insisted that the delay had nothing to do with a sell-off in US government bonds.

Aditya Bhave, an economist at Bank of America, argued that the proposed tax cuts and trade policies still under discussion would only worsen the US fiscal outlook.

“Tariff revenues will not be sufficient to offset the cost of the proposed new tax bill. We agree,” he wrote in a note, as quoted by Bloomberg on Tuesday (20/5).

Given this situation, investors are increasingly questioning whether US government bonds can still be considered a safe haven asset amid policy uncertainty and the persistent surge in national debt. (EF/ZH)