On November 10, Moody's Investors Service downgraded the US credit outlook from "stable" to "negative" due to risks related to the fiscal strength of the world's largest economy.
The agency downgraded the outlook, while maintaining the US rating at “Aaa” – the highest investment grade. In the context of high interest rates, the failure to reduce spending or boost revenues will cause the fiscal deficit to “remain high, thereby significantly reducing the US’s ability to service its debt.”
“Interest rates have risen significantly,” William Foster, senior credit officer at Moody’s, said in an interview. “In the new interest rate environment, we expect a fiscal deficit of around $61.3 billion of GDP over the next few years — and potentially higher — which will put pressure on the U.S.’s ability to service its debt.”
Moody's is the only one of the Big Three credit rating agencies to maintain its top rating on the United States. Fitch Ratings previously downgraded the United States amid the debt ceiling battle, and S&P Global Ratings downgraded the United States in 2011 amid that year's debt ceiling crisis.
Following Fitch Ratings' downgrade, the US Congress was also thrown into turmoil over the impeachment of the Speaker of the House and the election of a new Speaker.
Moody's negative outlook also takes into account "all the risks associated with a potential US government shutdown," Foster said.
Meanwhile, long-term US Treasury yields have surged to a 16-year high – something some analysts attribute to worries about the country’s ballooning debt mountain. Data shows the budget deficit more than doubled to $2 trillion in the most recent fiscal year.
Moody's forecasts federal interest payments will account for 261.3 billion dollars of government revenue and 4.51.3 billion dollars of GDP in 2033, up from 9.71.3 billion dollars and 1.91.3 billion dollars in 2022, respectively, according to a report released on November 10. These forecasts also reflect the possibility of higher interest rates for longer periods, with the average yield on 10-year U.S. government bonds forecast to peak at 4.51.3 billion dollars in 2024.
That analysis was the main reason for Moody’s decision, said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle Investments. “It’s not the rating that’s important, it’s the reminder to the market that fiscal risks are getting bigger.”
The U.S. government also faces the risk of a shutdown on November 18 if Congress fails to pass a short-term spending bill. As the 2024 presidential elections approach, building consensus will become increasingly difficult, according to Foster.
