Alexandra Semenova, Carmen Reinicke and Anya Andrianova
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(Bloomberg) -- Investors faced yet another bumpy start to the trading week with US assets coming under fresh pressure, although it’s mounting concern over American debt rather than tariffs generating the volatility this time.
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US equity and bond futures retreated with the dollar in early Asia trading after Moody’s Ratings announced Friday evening it was stripping the American government of its top credit rating, dropping the country to Aa1 from Aaa. The company, which trailed rivals, blamed successive presidents and congressional lawmakers for a ballooning budget deficit it said showed little sign of narrowing.
The downgrade risks reinforcing Wall Street’s growing worries over the US sovereign bond market as Capitol Hill debates even more unfunded tax cuts and the economy looks set to slow as President Donald Trump upends long-established commercial partnerships and re-negotiate trade deals.
On Friday, 10-year Treasury yields rose as high as 4.49% in thin volumes.
“A Treasury downgrade is unsurprising amid unrelenting unfunded fiscal largesse that’s only set to accelerate,” said Max Gokhman, deputy chief investment officer at Franklin Templeton Investment Solutions. “Debt servicing costs will continue creeping higher as large investors, both sovereign and institutional, start gradually swapping Treasuries for other safe haven assets. This, unfortunately, can create a dangerous bear steepener spiral for US yields, further downward pressure on the greenback, and reduce the attractiveness of US equities.”
Michael Schumacher and Angelo Manolatos, strategists at Wells Fargo & Co., told clients in a report that they expect “10 year and 30 year Treasury yields to rise another 5-10 basis points in response to the Moody’s downgrade.”
A 10-basis point increase in the 30-year yield would be enough to lift it above 5% to the highest since November 2023 and closer to that year’s peak, when rates reached levels unseen since mid-2007.
While rising yields typically boost a currency, the debt worries may add to skepticism over the dollar. A Bloomberg index of the greenback is already close to its April lows and sentiment among options traders is the most negative in five years.
In April, US markets across the board came under pressure after Trump’s tariff pledges forced a reappraisal of their place at the core of many investor portfolios. The selloff reversed in parts after the US president paused tariffs on China, but investor focus in the bond market quickly shifted to America’s fiscal trajectory.
