Following Moody’s decision on Friday to deprive the United States of its final AAA credit ratings, bond yields surged on Monday, dealing another significant blow to the roughly $29 trillion Treasury market.
The recent downgrade comes at a particularly challenging moment for the Treasury market, even while Wall Street wasn’t entirely surprised by the Moody’s decision—Fitch Ratings and S&P Global had already cut their top AAA ratings for the U.S. years prior.
Since the November elections, which put Republicans in charge of Congress and put Donald Trump back in the White House, foreign demand for Treasurys has been declining, raising fears that the U.S. debt may rise in order to fund tax cuts.
Then Trump’s April 2 tariffs sparked a “sell America” campaign that is likely to continue to put pressure on Treasurys and other dollar-denominated assets DXY, reignited fears of unchecked inflation, and surprised international trading partners.
Brian Rehling, head of global fixed-income strategy at the Wells Fargo Investment Institute, stated in an interview on Monday that “global investors are thinking twice before buying Treasury securities.” “Thus rates have moved higher.”
According to FactSet, the 10-year yield, BX:TMUBMUSD10Y, went up 4 basis points to 4.48%, while the 30-year Treasury yield, BX:TMUBMUSD30Y, briefly traded above 5% before falling back to 4.95% early Monday.
Increased yields may result in increased borrowing costs for the US government, corporations, and consumers. The most recent increase in yields coincides with a pivotal point in Republican efforts to push their “big, beautiful” tax and spending plan. Although it was previously estimated that the proposal would increase the U.S. debt by $3.3 trillion over the next ten years, that figure is still subject to change because the plan may encounter opposition in the Senate.
According to Rehling, “the consumer, of course, has been paying higher borrowing rates for some time now,” citing rising interest rates, inflation, and the U.S. deficit since the epidemic. However, he believes that consumers can cope as long as the job market and economy remain stable.
“The bigger issue is, can the U.S. government tolerate higher rates on a more sustained basis?” He made reference to interest costs, which have taken up a larger portion of the federal government’s budget in recent years.
Extended-duration As investors reevaluate the long-term safety of these instruments and the yield required to function as a long-term U.S. creditor, Treasurys have been particularly badly hit recently.
The Republican tax package, according to Adam Abbas, a portfolio manager at Harris Oakmark, has reignited discussion about the sustainability of the U.S. spending and deficit plans as well as the “exceptionalism” that Treasurys and other U.S. assets have enjoyed internationally.
Abbas expects the deficit to remain an issue without a simple fix, but he believes that U.S. exceptionalism will endure—possibly in a weakened form. “I do think the deficit, at some point, there’s going to have to be a serious undertaking, not just cuts around the edges,” he stated.
See also: Could America become the next Cyprus? The only other double-A rated nation to ever default is this one.
The Senate is expected to make changes to the tax and spending package that might “water down” the House’s projected spending cuts and create another “speed bump” for its timeframe, according to a BofA Global rates and currency team headed by Mark Cabana.
At first, Republicans hoped to have the law on Trump’s desk by Memorial Day so he could sign it.
In a client note on Monday, Cabana’s team stated, “It also would result in a bill that adds even more to the deficit than what the House is considering.” They predict that the final law will increase the deficit by $5 trillion to $6 trillion.
At the end of 2024, the U.S. deficit was estimated to be 6.28% of GDP; however, the BofA experts predict that it will increase to 7% to 8% over the next ten years.
According to FactSet, U.S. markets were recovering from earlier losses, with the Nasdaq Composite COMP essentially unchanged, the blue-chip Dow DJIA up 0.4%, and the S&P 500 SPX up 0.1%.
