Moody’s Downgrades U.S. Long-Term Credit Rating, Signaling All Major Rating Agencies Have Removed U.S. Sovereign Credit from AAA Status
This article is sourced from SignalPlus and compiled and written by odailynews.
(Background: The 30-year U.S. Treasury yield has surged past 5%! The United States has lost all AAA ratings; should investors be worried?)
(Additional Context: Tether holds $120 billion in U.S. Treasuries, making it the “19th largest in the world,” surpassing Germany, with a profit of $1 billion in Q1 this year.)
Moody’s has downgraded the long-term issuer and senior unsecured debt ratings of the U.S. government from Aaa to Aa1 and changed the outlook from negative to stable. This downgrade reflects the rising proportion of U.S. government debt and interest payments over the past decade, significantly exceeding that of other sovereign countries with similar ratings.
— Moody’s, May 16, 2025
The downgrade signifies that U.S. sovereign credit has been removed from AAA status by all major rating agencies. This information was released just hours after the U.S. stock market closed last Friday, reportedly prompting the U.S. House Budget Committee to expedite the “One, Big, Beautiful Bill” on Sunday night in an effort to minimize potential market impacts.
Setting aside political maneuvering and pre-scripted scenarios, is credit rating still important? Readers may recall that Silicon Valley Bank (SVB) held an “A rating” prior to its collapse. More seasoned readers might also remember the absurdly high ratings awarded to CDOs, CMOs, subprime mortgages, and Chinese real estate bonds.
To address this issue, we present the relevant points in a FAQ format:
When was the U.S. last downgraded?
July 2011: Standard & Poor’s (S&P)
August 2023: Fitch
Will there be immediate technical impacts?
For institutions constrained by ratings and unable to hold non-AAA bonds, the scale and irreplaceability of U.S. Treasuries as an asset class typically lead these institutions to adjust internal rules (as has happened in the past).
Regarding centralized clearing, DTCC and CME’s treatment of government bonds as collateral is based on duration and bond type, with less reliance on ratings.
For money market funds, short-duration allocations weaken the impact of credit ratings; in fact, demand for Treasury bills has shown almost no fluctuation, even through past downgrades and debt ceiling disputes.
What is the long-term reserve asset status of U.S. Treasuries?
In reality, the impact of President Trump’s tariff policies and global trade restructuring on global demand for U.S. Treasuries has been more profound than that of any rating agency.
How did the market react in the past?
During the 2011 downgrade, being the first of its kind and occurring amid the initial “debt ceiling crisis,” the market was quite shocked. The stock market fell approximately 20% from July to August. However, due to hedging and the ongoing quantitative easing policy at the time, the yield on 10-year U.S. Treasuries actually dropped by 120 basis points (indicating a price increase).
In 2023, the downgrade occurred in August, right after the early summer debt ceiling crisis, while the U.S. Treasury was also working to retrieve market liquidity by rebuilding its general account and issuing a large amount of Treasuries. At that time, the SPX index fell about 10%, while Treasury yields continued to rise by approximately 50 basis points throughout the year. Although this credit rating downgrade may have accelerated the relative market trend, overall, it has not fundamentally altered the market landscape.
Will this downgrade affect fiscal decision-making?
The House Budget Committee did indeed advance the budget proposal on Sunday night, indicating a certain degree of intent to mitigate potential market impacts. Will there be cuts to U.S. spending or efforts to control the deficit? While the downgrade may lend more weight to the voices of fiscal hawks, it is unlikely to change the long-term trend of uncontrolled spending and concerns over unsustainable U.S. Treasury supply.
This will increase uncertainty regarding the timing of the bill’s final passage and whether there will be delays, and due to adverse effects on the budget, it may weaken the potential positive effects of tax cuts.
What might the market’s reaction be?
In the stock market, given past experiences and the rapid rise in the market over the past few weeks without broad leadership, a short-term response is likely to be a instinctual decline. The trajectory of the bond market is harder to predict and will depend on factors such as the extent of risk aversion in the stock market, the interplay between fiscal hawks and Trump, whether the Senate can successfully pass the budget before the debt ceiling deadline, and whether this event will affect Trump’s 90-day tariff truce agreement.
Overall, U.S. stocks, Treasuries, and the U.S. dollar may face negative risks.
What is the current positioning in the macro market?
Macro funds, systematic funds, and quantitative funds have mostly covered short positions or reduced their holdings, and some have even turned to long positions.
Last week, the market witnessed a small “melt-up” as traders rushed to cover short positions, with the NYSE’s Advance-Decline Line indicator reaching a recent high.
How did last week’s economic data perform?
The performance was quite poor for the bond market. Despite recent easing in tariff policies, the University of Michigan’s consumer expectations index dropped significantly. The overall index fell to its lowest point since June 2022, nearing levels not seen since the 1980s. Long-term inflation expectations rose to their highest level since 1991 (4.6%). One-year inflation expectations even reached 7.3%, the highest level since 1981.
Should the market be concerned about foreign capital selling?
Let’s review the situation over the past few months. Non-U.S. investors have stopped increasing their holdings in U.S. equity funds since March and have become net sellers of bond funds. This trend may continue in the short term.
However, in terms of actual impact, bank data indicates that foreign investors held a total of $57 trillion in U.S. dollar assets in 2024, significantly up from $2.2 trillion in 1990. Of this, approximately $17 trillion is in equity assets and $15 trillion in bonds. In other words, foreign investors hold around 20% of the total supply of U.S. stocks and 30% of the total supply of U.S. bonds. This is not a small amount and cannot be casually sold off without affecting the entire capital market structure. Furthermore, assets are distributed among different foreign investors; any reckless action by one party would involve the game-theoretic responses of other participants.
In the stock market, the key remains in corporate earnings performance, which has been strong so far. According to JPM data, SPX index earnings in the first quarter exceeded expectations by approximately 8%, with 70% of companies having released earnings reports, of which 54% reported revenues above expectations, and 70% had earnings exceeding expectations, while the EPS growth of the Magnificent Seven reached as high as 28%, far outperforming the index.
In terms of ownership structure (not considering opaque offshore structures like those in the Cayman Islands), the UK, Canada, and Japan are currently the top three holders of U.S. assets globally, and they are also closely allied with the United States. China ranks fourth, with a share of about 4%, significantly lower than the top group’s 8-9%.
Based on trends over the past month, Japanese investors have indeed reduced their U.S. Treasury holdings while significantly increasing their U.S. equity positions, indicating this is more of an asset allocation adjustment rather than a true de-dollarization. In short, large-scale capital withdrawal or de-dollarization is unlikely to occur in the short term.
How has cryptocurrency performed?
Interestingly, while gold prices have fallen about 7% from their peak, cryptocurrency prices have remained stable throughout the trend. Unlike the synchronized rise of gold and BTC in previous months, BTC has continued to rise despite the weakening of gold prices, which is also reflected in ETF fund flows. Gold ETFs have seen outflows, while BTC ETFs have seen a slight increase in flows, with CME’s gold and BTC futures positions showing similar trends.
Overall, as the macro market stabilizes and the dollar depreciation trade reflects across most asset classes, we anticipate that the disconnection of correlations and relative value opportunities among these micro-assets will continue to emerge until the next significant geopolitical development materializes.
Wishing everyone successful trading!
