US Credit Rating Cut Over Massive Government Debt

The US was downgraded by Moody’s Ratings on Friday thanks to government debt that’s approaching a mind-numbing $37 trillion. It was a dramatic move that cast further doubt on the polarized nation’s status as the world’s highest-quality sovereign borrower. Moody’s lowered the US credit score to Aa1 from Aaa, joining Fitch Ratings and S&P Global Ratings in grading the world’s biggest economy below the top, triple-A position.

The one-notch cut comes more than a year after Moody’s changed its outlook on the US rating to negative. The federal budget deficit is running near $2 trillion a year, or more than 6% of gross domestic product, and Congressional Republicans are pushing through budget legislation that could add trillions of dollars more. “While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s wrote in a statement.

Earlier today, new data showed US consumer sentiment has fallen to the second-lowest level on record, and inflation expectations climbed to multi-decade highs. The preliminary May sentiment index declined to 50.8 from 52.2 a month earlier, according to the University of Michigan. That was lower than all but one estimate in a Bloomberg survey of economists. The main reason cited was President Donald Trump’s trade war.

Nearly three-fourths of respondents to the Michigan survey spontaneously mentioned tariffs. The topic crosses partisan lines, including a notable share of Republicans bringing it up. The new, sobering survey data comes as inflation data from the Trump administration’s Department of Labor has been unexpectedly upbeat, coming in softer than estimates three months in a row.

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China shrank its holdings of US Treasuries in March, with the UK replacing it as the No. 2 overseas owner. China was the top holder of Treasuries as recently as 2019, when Japan overtook it. Total overseas holdings of the debt rose $233.1 billion, to $9.05 trillion, Treasury Department figures showed Friday. While the release showed there was no revolt against American government securities in the first few months of the Trump administration, the data predates the destabilization of the US Treasuries market last month following Trump’s rollout of “reciprocal” tariffs.

Stocks rose Friday as the Financial Times reported the US and the European Union broke an impasse to enable tariff talks, bolstering optimism about negotiations with America’s top trade partners. The news comes after the Trump administration announced an agreement with the UK and a temporary truce with China in the trade war. The renewed optimism sent the S&P 500 up 0.7% Friday, with the gauge climbing over 5% for the week. Action in the bond market was muted, though Treasuries saw a third straight weekly drop—the longest slide this year. The dollar rose despite data showing sentiment among options traders is the most negative in five years. Here’s your markets wrap.

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Written by: David Rovella @Bloomberg

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