Moody's Downgrades US Credit Rating For First Time Since 1919 Amid Rising Debt Concerns

In a significant development for global financial markets, Moody's Investors Service has downgraded the United States' sovereign credit rating for the first time in over 100 years. The rating agency lowered the long-standing rating by one notch to "Aa1" from the premier "Aaa" status that the US had maintained since 1919. Additionally, Moody's revised its outlook from "negative" to "stable."

Key Factors Behind the Downgrade

The downgrade stems primarily from escalating concerns over America's expanding debt burden, which has now reached a staggering $36 trillion. Moody's cited persistent fiscal deficits and mounting interest payments as key drivers behind this decision.

"Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's stated in its Friday announcement.

This move follows Moody's previous decision in 2023 to shift the United States to a negative outlook, signaling growing apprehension about the nation's fiscal trajectory. The agency was the last of the three major credit rating agencies to downgrade the US sovereign rating.

Alarming Debt Projections

According to Moody's analysis, current fiscal proposals under consideration by US lawmakers appear insufficient to achieve a sustained, multi-year reduction in deficits. The agency projects that the federal debt burden will continue its upward climb to approximately:

• 134% of GDP by 2035
• Up from an estimated 98% in 2024

This projection underscores the magnitude of the fiscal challenges facing the world's largest economy, despite assurances from the current administration about plans to address deficit concerns.

Trump Administration's Response to Fiscal Challenges

Since returning to the White House in January 2025, President Donald Trump has pledged to balance the federal budget and reduce government borrowing costs. Treasury Secretary Scott Bessent has repeatedly emphasized these goals as administration priorities.

However, Moody's assessment suggests that current efforts to increase revenues and control spending have yet to convince market participants and investors of their efficacy. The agency's downgrade indicates skepticism about the implementation and impact of proposed fiscal measures.

Historical Context of US Credit Rating Changes

This downgrade follows a similar move by Fitch Ratings in August 2023, which also lowered the US sovereign rating by one notch. Fitch cited anticipated fiscal deterioration and recurring debt ceiling negotiations as factors threatening the government's ability to meet financial obligations.

Standard & Poor's was the first major rating agency to strip the United States of its "AAA" rating back in 2011, following a protracted debt ceiling standoff that raised concerns about fiscal governance.

Market Reaction to the Downgrade

The announcement, which came after market close on Friday, had an immediate impact on US Treasury bonds. Key market movements included:

• Yields on US 2-year Treasuries rose by 2 basis points to 3.993%
• 2-year yields reached a session peak of 4.012%
• Benchmark 10-year notes reversed earlier declines and climbed to 4.499%

These market reactions highlight investor concerns about the implications of the rating downgrade for US government borrowing costs and overall fiscal stability.

Implications for Investors and Global Markets

While the immediate market reaction has been relatively contained, the downgrade could have longer-term implications for global financial markets. As the US dollar and Treasury securities serve as foundational elements of the international financial system, changes in perception about US creditworthiness may influence investment decisions and risk assessments worldwide.

For retail investors, this development underscores the importance of diversification and careful risk management in investment portfolios. The impact on borrowing costs could eventually affect everything from mortgage rates to corporate financing.

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Categories: federal debt burden, Moody's Aa1 rating, US credit rating downgrade