It doesn’t appear that Moody’s decision to downgrade the rating of US government debt will have a significant impact on the corporate bond market.
In a phone interview on Monday, Luis Alvarado, global fixed-income strategist at Wells Fargo Investment Institute, stated that the downgrade would create “a little bit of noise,” with long-term Treasurys becoming more sensitive to worries about U.S. fiscal deterioration. However, he stated that corporate credit should be “fairly guarded” against Moody’s removing the U.S. from its triple-A rating, in part because corporations’ balance sheets generally seem to be in good shape, even though “knee-jerk” reactions caused Treasury yields to rise.
According to Alvarado, investors were aware that the United States was experiencing a significant deficit and that its rising debt levels were placing the country on an unsustainable fiscal track. “This has been cooking for a while,” he explained, adding that other major credit rating agencies had already taken steps to deprive the United States of its triple-A rating and that concerns about the deficit were already ingrained in bond pricing.
With well-known funds focusing on the US investment-grade bond market finishing roughly flat, long-term Treasury rates finished Monday slightly higher.
For instance, according to FactSet data, the Vanguard Total Bond Market ETF AGG, an exchange-traded fund that offers broad fixed-income exposure to investment-grade assets such as corporate loans, mortgages, and Treasurys, fell less than 0.1% on Monday.
The iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, which tracks an index of U.S. investment-grade bonds issued by firms, gained less than 0.1% on Monday. This is in contrast to funds that concentrate on corporate credit.
In a phone interview, Joe Quinlan, head of market strategy for the chief investment office at Bank of America, stated, “I like to remind investors that Uncle Sam has an ace up his sleeve,” referring to the “resilient” U.S. private sector, where businesses continue to spur development and innovation. According to him, corporate balance sheets are generally in “good shape,” since many businesses refinanced debt during the epidemic by taking advantage of the low interest rate environment.
Following the close of the U.S. stock market on Friday, Moody’s announced that it has downgraded the U.S.’s credit rating from Aaa to Aa1, citing the country’s rising government debt and interest-payment ratios that are “significantly” higher than those of similarly rated sovereigns as the reasons.
Read: Why UBS says a significant selloff in Treasurys is unlikely to occur as a result of Moody’s removing the U.S. from its triple-A rating
In a research note released Monday, a Goldman Sachs economics researcher stated that “Moody’s downgrade of the U.S. credit rating from Aaa to Aa1 appears to have been influenced by the pending fiscal package” in Congress.
The U.S. deficit is expected to reach 9% of GDP in 2035, according to Moody’s, which is about 2 percentage points more than Goldman’s estimate, the analyst added.
“While we do not believe the downgrade would force any holders of Treasury securities to sell, it highlights the deteriorating fiscal outlook and comes at a time when markets are already attuned to fiscal risks,” the analyst at Goldman Sachs stated.
According to Dow Jones Market Data, the yield on the 10-year Treasury note BX:TMUBMUSD10Y increased 3.6 basis points on Monday to 4.473%, making it up 30 basis points so far this month based on 3 p.m. Eastern levels. Prices and bond yields move against each other.
Citing an easing of trade tensions between the United States and China, Goldman Sachs raised its 2025 projection for the 10-year Treasury yield from 4% to 4.5% at the end of last week.
Since President Donald Trump’s announcement of “liberation day” tariffs on April 2 triggered a worldwide trade war, tensions between the two nations have been high. However, after tit-for-tat hikes that drove those levies to such abnormally high levels that investors feared a recession would follow, the two nations recently agreed to reduce the tariffs that each charges on the other, at least temporarily.
Perhaps the U.S. economy won’t slow down as much as anticipated following the “China truce,” which implies the Fed may lower interest rates as much as initially anticipated, Alvarado added.
According to him, Wells Fargo Investment Institute is “neutral” on high-yield debt and currently holds a “favorable view” on investment-grade corporate bonds. High-yield bonds have a higher risk since they are issued by businesses that are more likely to have debt loads that could make it difficult for them to pay interest rates during a recession.
According to Alvarado, Wells Fargo considers the three- to seven-year intermediate-term maturities in the fixed-income market to be the “sweet spot” for investors.
Investors run the risk of seeing long-term rates in the bond market’s so-called yield curve rise in response to worries over the US budget deficit. “If we are way too far out on the long end of the curve, and interest rates are set to move higher, then the bonds are probably going to lose value,” he stated.
Amid concerns that tariffs are hurting the American economy, investors will be keeping an eye on how the tax and spending plan develops in the interim.
“It’s important what type of legislation we get out of Washington,” Quinlan stated. Getting the economy “back to speed” following its recent slump is “the key,” he stated.
