To The Moon

Impact of Moody's Downgrade: Fiscal Policy Pressures Increase as Treasury Bond's Demand Falls

Moody's cut late Friday (link), downgraded the U.S. credit rating to Aa1 from Aaa, rekindling concerns about the size of the U.S. budget deficit, even as a bill to further widen the deficit is being considered across Houses on Capitol Hill.

While investors await the final form of the bill,Wells FargoThe Wells Fargo Investment Institute (WFII) released a note covering what it believes is the main implications for investors from the downgrade.

First of all, the research team of Fargo Investment Institute, a rich country, led by bond analyst Jon North, quickly pointed out that Moody's took this action on the grounds of "failure to increase revenue or structurally cut expenditure" and "the ratio of public debt and interest payments continues to rise", which brought its rating in line with the other two major rating agencies-Standard & Poor's and Fitch-which downgraded the sovereign credit rating of the United States in 2011 and 2023 respectively.

The WFII expects the downgrade to have little impact on the market, saying that "the risk of a fiscal crisis appears to be low," but it added that the resulting upward pressure on Treasury Bond yields, which serve as a reference for most of U.S. borrowing, "may also raise interest rates on consumer loans, including mortgages and credit cards, affecting households and businesses."

Other adverse effects of the downgrade include a decline in global preference for U.S. Treasury Bond. WFII said, "While demand for Treasury Bond is likely to remain strong, we believe that the decline in foreign appetite after President Trump's tariff increase announcement, which is already obvious, may exacerbate fiscal pressure."

North and his team wrote: "Politically, the downgrade may be seen as a setback for the Trump administration, thus exacerbating the debate about fiscal policy.

As a guide to fixed-income investors, WFII prefers medium-term notes (3-to 7-year notes), which it believes will "provide attractive yields and reduce maturity exposure."

(Stephen Culp)

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Market Live articles from earlier Monday:

Leading economic index records biggest monthly drop in more than two years-click here (link)

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US Futures Fall at Open After Moody's Downgrade-Click Here (link)

Are European Stocks Overvalued? -Click here (link)

The dollar's fiscal wrinkle-click here (link)

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Go low but calm-click here (link)

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Morning Bid: So, should China spend more and the US less? -Click here (link)