Moody's downgrades U.S. rating from AAA to Aa1; what are the consequences of this move, and will the economy be affected? Here are all the details

Moody's Ratings surprising move to reduced the credit rating of the US government from its highest AAA to Aa1, because of increasing government debt, could worsen US president Donald Trump's efforts to cut taxes and send ripples through global markets, as per a report.

Immediate Market Impact

The downgrade was announced after the markets closed on Friday, but its effect was instantaneous on Treasury bonds. According to Reuters, analysts have already warned that it could give investors a pause when markets open for trading on Monday.

After the announcement, yields on US 2-year Treasuries increased, and were up 2 basis points (bps) late on Friday at 3.993%, and climbed to a session peak of 4.012%, reported Reuters. While, yields on benchmark 10-year notes reversed the earlier fall and jumped as high as 4.499%, as per the report.


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Why the Downgrade Happened

A Stanford finance professor who was formerly on Moody's board, Darrell Duffie pointed out that, "It basically adds to the evidence that the United States has too much debt," adding, "Congress is just going to have to discipline itself, either get more revenues or spend less," as quoted in the report.

The downgraded rating came after a tax bill extending the 2017 tax cuts, which Trump had pushed for, failed to clear a key procedural hurdle on Friday as the move might add trillions to the federal government's debt, as per nonpartisan analysts, according to Reuters. While, the bill failed to pass a vote in the House Budget Committee, even though, Trump had called for unity among Republicans, as per the report.

Managing director at Minschler Financial, Tom di Galoma highlighted that the rating agency's move was surprising, saying, "I think that is highlighting the problems on the budget talks in Congress, the bill failed to pass today in the House committee," quoted Reuters.

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Long-Term Economic Concerns

Investors check credit ratings in gauging companies' and governments' risk profiles when they seek funding through debt capital markets, as per the report. In most cases, the lower a borrower's rating, the higher its cost of financing, according to Reuters.

Tolou Capital Management's chief executive, Spencer Hakimian said, "The downgrade of the US credit rating by Moody's is a continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs for the public and private sector in the United States," as quoted in the report.

FAQs

How did investors react?
Treasury bond yields jumped after the news. Investors will likely be cautious when markets reopen on Monday.

Is this the first time the US has been downgraded?
No. Other agencies like S&P and Fitch have downgraded the US in the past.