When Maryland's credit rating dropped last week, who knew it would be a precursor for the entire country?
Moody’s Ratings made waves late last Friday when the credit rating agency downgraded US creditworthiness from a perfect AAA to Aa1—a small demotion on the agency’s 21-notch rating scale that has big ramifications across international financial markets.
It was no coincidence that Moody’s made its decision the same day that President Trump’s “big, beautiful bill” stalled in the House of Representatives. Moody’s estimated that the tax and spending bill would add about $4 trillion to the federal fiscal primary deficit over the next decade.
“As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation,” Moody’s said in its press release. “We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024.”
Just so you know: The US had a fiscal deficit of $1.8 trillion last year and the deficit has already hit $1.05 trillion this year, while the government paid $882 billion in interest payments on $36 trillion in national debt last year—and has already paid $579 billion toward interest this year.
Or, put another way: Rising deficit + rising interest payments = the US’ finances aren’t as strong as they once were.
So, what does this mean?
On paper, this is a big deal. One of the reasons the US is such an international financial powerhouse is that its credit is historically unimpeachable. Investors around the globe love to buy US bonds because they know the country is going to pay them back, and the US government uses the proceeds of those sales to fund, well, everything the US government funds.
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A lower credit rating means investors are just a little less sure that their investment is secure, and any decline in confidence could translate to lower revenue for the government just when it needs the money.
In practice, it’s no biggie. Moody’s was the third and final credit rating agency to downgrade the US (S&P did it way back in 2011, Fitch made its cut in 2023), so the only surprise was how long it took Moody’s to join its colleagues. The US government’s massive debt burden is no state secret, and economists saw this one coming from a mile away.
No, no: What does this mean for me?
Ah, in that case: It depends on your investments.
Bond traders can now demand a higher yield in order to offset the higher risk of US Treasuries. That’s a very real problem for President Trump, who has made it a stated goal to keep 10-year Treasury yields low for a variety of reasons, including to help finance government debt.
More broadly, that “sell America” trade that swept through markets late last month could rear its head once again as foreign investors fade US credit and the value of the dollar sags. That may mean knock-on effects for equity investors as US stocks lose their appeal and declining sentiment contributes to a market slump. It’ll also likely lend more fuel to the gold rally of 2025 as traders search elsewhere for something completely secure to invest in.—MR