Moody’s Downgrade Triggers Yield Spike, Drives Volatility in S&P500 and Nasdaq

Moody’s Downgrade Ends U.S. Triple-A Status—What Traders Need to Know

Moody’s has stripped the U.S. of its last Aaa credit rating, citing the government’s failure to contain rising deficits and interest costs. The downgrade to Aa1, announced after Friday’s market close, brings all three major rating agencies into alignment and raises questions for fixed income and equity investors alike. While the move was widely anticipated, it sharpens attention on fiscal risks heading into a politically uncertain period.

Treasury Yields Surge—Are Bonds Still a Safe Haven?

Treasury yields jumped Monday in response. The 30-year yield rose over 12 basis points to 5.02%, the 10-year climbed to 4.54%, and the 2-year touched 4%. Moody’s warned that mandatory spending and debt-servicing costs could consume nearly 30% of federal revenue by 2035.

With no credible deficit-reduction plan in play, bond traders are adjusting for a structurally weaker U.S. credit profile. Long-end yields are now back at levels that triggered policy concern earlier in the year.

S&P 500 and Nasdaq ETFs Slide on Downgrade Shock

Equity futures turned lower following the downgrade, with the S&P 500 ETF off 1% and QQQ down 1.3%. The credit action, while not unexpected, adds to the list of macro headwinds for stocks. Strategists from firms including Truist and JonesTrading said the move may accelerate profit-taking after recent equity gains. While the downgrade is unlikely to drive a systemic repricing, the signal is clear: U.S. fiscal deterioration is back on the radar for global investors.

Federal Reserve in the Spotlight as Yields Spike

Traders are now watching the Federal Reserve closely. With speeches from Atlanta’s Bostic, New York’s Williams, and Dallas’s Logan due Monday, market participants will be alert to any hints that rising yields could influence policy direction. Elevated borrowing costs may do some of the Fed’s tightening for it, but if inflation expectations stay anchored, policymakers could hold rates steady.

Market Forecast: Bearish Bias for Equities, Yields to Stay Elevated

In the short term, markets may lean bearish as investors recalibrate risk in both stocks and bonds. The downgrade serves as a wake-up call on fiscal discipline, with Treasury supply risks and policy uncertainty now front and center. Expect further pressure on long-duration assets, while equity bulls may struggle to extend recent gains without fiscal clarity.

More Information in our Economic Calendar.