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Moody’s Ratings recently downgraded the credit rating of the United States. But what does this downgrade signify, and how might it impact Treasury investments?
Why did Moody’s downgrade the credit rating?
Moody’s Ratings lowered the U.S. credit rating on May 16 from Aaa, the highest rating, to Aa1. This shift represents a one-notch decrease on the agency’s scale.
The decision by Moody’s reflects concerns about the nation’s financial management over the past decade and their anticipation of increasing government debt and interest rates.
“The U.S. government has been spending more while generating less tax revenue, leading Moody’s to believe that the country’s economic strengths no longer outweigh these weaknesses,” stated Elizabeth Renter, BW’s senior economist.
What does a credit rating downgrade mean?
A credit rating downgrade indicates that government debt, including bonds and securities, is perceived as becoming riskier. However, this doesn’t necessarily warrant panic.
“Despite the downgrade being minimal, our robust economy plays a role in this,” mentioned Renter.
Daniel Masuda Lehrman, a certified financial planner and founder of Masuda Lehrman Wealth in Honolulu, Hawaii, added, “Moody’s is the last major credit rating agency to downgrade the U.S., following S&P in 2011 and Fitch in 2023.”
What’s happening now?
Following Moody’s rating adjustment, Treasury security yields have risen, causing prices to drop. Typically, Treasury prices and yields move inversely—increased interest rates prompt investors to pursue higher yields, reducing the value of previously issued bonds with lower fixed yields.
“There has been a slight sell-off of Treasurys in the market, leading to increased yields, particularly for longer-term Treasurys,” explained Lehrman.
What does this mean for Treasury investments?
Despite the slight decrease in Moody’s credit rating, Treasury securities remain liquid, making them relatively easy to convert into cash.
Lehrman advised investors to avoid overexposure to Treasurys with extended maturity dates, as they tend to be more volatile. Shorter-term investments like T-bills may experience less impact.
“New investors may benefit from higher yields in the future,” Lehrman added. “Despite the downgrade, the consensus is that Treasurys remain secure due to their liquidity and the status of the dollar.”