Moody’s Downgrade: Noise in the Signal—What Investors Should Watch Instead
Last week, credit rating agency Moody’s downgraded US sovereign debt from AAA to Aa1.
5.23.2025
The rationale for the downgrade? Rising deficits and a growing debt load. The market reaction? Minimal.
This downgrade aligns Moody’s with its peers—S&P downgraded the US in 2011, Fitch in 2023. It’s not news to anyone paying attention to fiscal policy. And for allocators, the downgrade is largely irrelevant.
Here’s why:
- The trajectory of the US deficit is well known and already priced into the market.
- Treasuries remain the most liquid, risk-free assets globally, and a critical benchmark for collateral, pricing, and risk models.
- Credit ratings are lagging indicators. Market-based measures—like credit default swaps and Treasury yields—are far more informative.
As Cullen Roche of Discipline Funds wrote:
“If the US government is an Aa1 entity then that’s the new AAA… there’s just no universe in which JNJ (Johnson & Johnson), with their measly $90B of annual revenue and non-existent printing press, can ever be placed on the same pedestal as the US federal government.”
What does matter is the underlying trend in yields.
The yield on the 30-year Treasury broke above 5% again, crossing a psychologically and technically significant threshold. Outside of a brief spike during the 2023 post-COVID inflation surge, the 5% level hasn’t been breached since 2007.
Key drivers behind this move:
- Supply Pressure: We expect the Treasury to issue roughly $10 trillion in bonds this year to refinance maturing debt and fund deficits.
- Demand Weakness: The Fed has stepped back as a buyer. Commercial banks are sidelined. Foreign buyers aren’t filling the gap.
- Policy Backdrop: A tax bill moving through Congress is expected to widen the deficit further—fueling investor concerns and pushing term premiums higher.
The result: yields are rising to clear the market. That’s not a ratings story—it’s a market structure story.
Why it matters:
- Cost of Capital: Higher long-end yields feed through to mortgages, corporate borrowing, and public finance.
- Deficit Feedback Loop: As yields climb, the cost of servicing the debt grows, pressuring future budgets.
- Portfolio Implications: Rising yields suppress bond prices but also reset return expectations higher—attractive for new capital, problematic for legacy positions.
Our Positioning at CCA
We’ve anticipated the “higher for longer” rate environment. Our strategies reflect this view: shorter duration where appropriate, active curve positioning, and opportunistic entry points on volatility.
Moody’s downgrade is a headline. The real signal is in the data—yield levels, supply/demand dynamics, and policy direction. That’s where we remain focused.
Disclosure: Unless stated otherwise, views, opinions or forecasts expressed in this blog are those of the author and do not necessarily reflect those of the Adviser and/or its employees. The contents of this blog are distributed for informational purposes, and are not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in these communications is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational, and illustrative purposes.