U.S. Credit Downgrade triggers Mixed Stock Market Reactions
U.S. stock markets showed mixed performance following a notable downgrade of the country’s credit rating. On May 19, the Dow Jones edged up slightly to 42,676 points. Though, the S&P 500 and Nasdaq saw declines of 0.24% and 0.37%,respectively.
The downgrade came from Moody’s, a major credit rating agency. It lowered the U.S. credit rating from Aaa to Aa1. this aligns with previous downgrades by Standard & Poor’s in 2011 and Fitch in 2023.
Following the downgrade, U.S. Treasury yields surged.The 30-year Treasury yield hit 5.03%, it’s highest since November 2023. The 10-year and 2-year yields also rose to 4.5% and 3.993%,respectively.
Moody’s cited growing government deficits as the reason for the downgrade. The agency warned that extending the 2017 tax cuts could add $4 trillion to the deficit. It also noted that U.S. administrations and Congress have failed to agree on measures to reduce fiscal deficits.
High treasury yields mean the U.S. government must pay more in interest on new Treasuries. This can create a cycle where higher interest costs hurt the ability to pay, pushing investors away and increasing borrowing costs further.
moody’s analysts stated,“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
