Moody's Downgrade of US Credit Rating Raises Concerns Over Growing Debt and Fiscal Policy

Moody’s downgraded the US sovereign credit rating by one notch, marking the last major rating agency to lower America's top rating due to concerns around the country’s massive $36 trillion debt.

This downgrade came amidst ongoing efforts by Republicans in Congress to approve a legislative package, dubbed the 'Big Beautiful Bill,' which includes tax cuts, spending increases, and reductions in social safety nets that could add trillions more to the national debt.

Investors are nervous about the uncertain fate of this bill, even while some optimism is growing over trade developments.

The bill recently failed to pass a significant hurdle, with President Trump pushing for unity to get it through.

Experts like Carol Schleif, a chief market strategist, say that bond investors—called 'bond vigilantes'—are closely watching Washington to ensure fiscal discipline, as these vigilantes can punish governments by making their borrowing more expensive if policies seem reckless.

The downgrade from Moody’s follows earlier downgrades by Fitch and Standard & Poor’s and is expected to push up borrowing costs for both the public and private sectors in the US, according to Spencer Hakimian of Tolou Capital Management.

However, Gennadiy Goldberg from TD Securities mentioned that forced selling of US debt by funds restricted to top-rated securities is unlikely because many have already adjusted their criteria after previous downgrades.

Still, the market’s focus is expected to sharpen on fiscal policy and the ongoing bill negotiations in Congress.

Some strategists, such as Scott Clemons, are concerned that if the government’s spending appears too careless, investors may avoid buying long-term government bonds, which affects the government's ability to borrow cheaply.

The Committee for a Responsible Federal Budget estimates that the bill could add about $3.3 trillion to US debt by 2034, or up to $5.2 trillion if temporary measures are extended.

Moody’s criticizes consecutive administrations for failing to lower deficits and interest costs, doubting that the current fiscal proposals will meaningfully reduce the debt gap.

Market signals like the recent rise in the 10-year Treasury term premium—which is basically the extra return investors want to hold long-term US debt reflecting risk—show growing fiscal worries.

Treasury Secretary Scott Bessent is focused on controlling 10-year Treasury yields, which recently stood at 4.44%, slightly lower than before Trump took office.

Experts warn that a big increase in the deficit, especially with already high deficits, could push yields even higher, making borrowing more expensive.

On the other hand, the White House dismissed these worries, calling Moody’s downgrade political and arguing that Trump’s policies have brought investments, job growth, and no inflation.

Interestingly, some believe the tax package might improve the fiscal outlook compared to earlier forecasts, as tariff revenues and spending adjustments could reduce the bill’s expected cost.

Barclays lowered its estimate of the bill’s deficit impact from $3.8 trillion to about $2 trillion over the next decade.

However, there’s urgency as the government faces deadlines: the House aims to pass the bill before May 26, and the debt limit must be raised by mid-July to avoid default.

The Treasury already hit its borrowing cap in January and is using temporary measures to keep operating, but could run out of cash—the so-called 'X-date'—by August.

Investor nervousness is evident; for example, Treasury bills maturing in August are yielding more than those maturing sooner or later, which is unusual and signals concern.

Within the Republican Party, there’s agreement to extend Trump’s 2017 tax cuts but disagreement on how to cut spending to balance the lost revenue.

Most federal spending is mandatory, covering social welfare programs that Trump promised not to cut, limiting the room for budget cuts.

Morgan Stanley’s strategist Michael Zezas says any politically acceptable package will probably increase deficits short-term and offer little economic boost.

Anne Walsh from Guggenheim Partners also commented that without a serious effort in Washington to reset spending, improving the US fiscal path significantly looks unlikely.

She described the current financial path as unsustainable.