Alexandra Semenova
Updated 5 min read
In This Article:
(Bloomberg) — Investors face yet another bumpy start to the trading week, although it’s mounting concern over US debt rather than tariffs likely generating the volatility this time.
Most Read from Bloomberg
Financial markets reopen in Asia on Monday after Moody’s Ratings announced Friday evening it was stripping the US 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.
In a potential sign of things to come on Monday, 10-year Treasury yields rose as high as 4.49% in thin volumes on Friday and an exchange-traded fund tracking the S&P 500 fell 0.6% post-market.
“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 (WFC)., 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.
European Central Bank President Christine Lagarde told La Tribune Dimanche in an interview published on Saturday that the dollar’s recent decline against the euro is counterintuitive but reflects “the uncertainty and loss of confidence in US policies among certain segments of the financial markets.”
