US Credit Downgrade: What Are the Consequences?

The United States no longer holds a perfect credit rating from Moody’s Ratings, which has lowered the country’s sovereign rating from AAA to Aa1. While the outlook was revised from negative to stable, the move marks a significant shift in how global credit agencies view the fiscal health of the world’s largest economy.

The downgrade ends more than a century of top-tier ratings from Moody’s, which had maintained the AAA designation since 1917. The decision places Moody’s in line with the other two major agencies: Standard & Poor’s downgraded the US in 2011 and Fitch Ratings in August 2023.

Why Did the Credit Agency Downgrade the US Credit Rating?

Moody’s cited long-term concerns about rising government debt and the lack of effective political response to growing deficits. According to the agency, the downgrade reflects “the continued rise in the US government’s debt burden and the higher interest costs associated with it,” which have steadily outpaced revenue growth.

The agency warned that without meaningful fiscal reforms, the US will continue to face structurally large deficits. Its projections indicate that the federal debt could grow from 98% of GDP in 2024 to approximately 134% by 2035. Over that same period, interest payments on the debt are expected to rise sharply, potentially consuming 30% of federal revenues by 2035 — a significant increase from 18% in 2024 and just 9% in 2021.

The announcement came on the same day Congress failed to pass a key budget bill, blocked by members of the president’s own party. This latest episode of political gridlock only reinforced Moody’s concerns about the government’s ability to manage its finances over the long term.

Why Is the Outlook “Stable”?

Yet, despite the downgrade, Moody’s revised the outlook on US credit to stable, signaling no further changes are likely in the near term. That shift reflects the agency’s view that, while the fiscal picture has weakened, the United States still retains exceptional credit strengths.

These include a massive, diversified economy with high average incomes, a resilient private sector, and a strong record of innovation and productivity. The Federal Reserve and other macroeconomic institutions continue to be seen as credible and effective, particularly in navigating shocks and policy challenges.

Most importantly, the US dollar’s role as the world’s primary reserve currency continues to provide the country with unparalleled financial flexibility according to the credit agency. Global demand for dollar-denominated assets remains robust, even as questions grow around long-term sustainability. This demand acts as a powerful buffer, giving the US government access to funding at terms few other countries can match, despite its rising debt burden.

Markets Responded Quickly

Yields on US Treasuries rose immediately after the announcement. The 10-year Treasury yield climbed from 4.445% to above 4.49%, while the 30-year yield surged from 4.904% to more than 4.96%, according to CNBC data.

A downgrade of sovereign credit typically raises the perceived risk of lending to that country, forcing it to offer higher returns to attract buyers. That shift in yields reverberates across financial markets, influencing the cost of capital for everything from corporate bonds to consumer credit.

Rising Yields: What Does This Mean for the US Economy and Investors?

The consequences for the broader economy could become more visible in the months ahead.

Rising Treasury yields mean higher borrowing costs — not only for the federal government but also for households and businesses. Mortgages, auto loans, student debt, and credit card rates are all pegged, directly or indirectly, to Treasury benchmarks. If the government must spend more on interest payments, it leaves less room for public investment, potentially weakening long-term growth prospects.

For investors, the downgrade may prompt a reassessment of portfolio exposures.

Although Treasuries remain deeply embedded in global markets, a lower rating could alter the risk-weighting of US sovereign debt in institutional models. Some funds with strict mandates may even be forced to adjust allocations. While the downgrade was widely expected and unlikely to trigger major immediate dislocations, it reinforces a growing unease about the long-term fiscal trajectory of the US.

Bottom-Line

In the end, the Moody’s downgrade doesn’t suggest an imminent crisis, but it does mark a turning point. For traders, investors, and policymakers alike, it’s a reminder that even the most trusted credit can erode over time — and that the cost of inaction on fiscal issues is now starting to show up in the market’s risk calculus.