Moody’s views on US government triple-A rating

Moody's views on US government triple-A rating

Moody’s Maintains Top Rating for the United States Amidst Downgrades and Investor Skepticism

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Moody’s, one of the three major credit rating agencies, remains the last agency to uphold a top rating for the United States. This comes after Fitch downgraded the sovereign rating earlier this week and Standard & Poor’s lowered it in 20111. Although Fitch’s downgrade to AA+ from AAA sparked volatility in stock markets and raised concerns about the country’s financial health, the impact on U.S. debt trading was minimal. The downgrade places the U.S. below countries like Australia, Canada, and certain European nations, according to Fitch23.

Investors, however, are skeptical that a Moody’s downgrade would significantly impact the U.S. bond market. The U.S. bond market is considered a safe haven due to its depth and liquidity. Consequently, investors are not particularly concerned about forced selling in rating-sensitive portfolios4. Lawrence Gillum, the chief fixed income strategist for LPL Financial, stated, “As long as U.S. government debt is the risk-free asset, it’s unlikely a downgrade by Moody’s would elicit a much different response than what occurred (or didn’t occur) with Fitch”5.

Additionally, the previous downgrade by Standard & Poor’s more than a decade ago led many institutions to adjust their mandates, explicitly focusing on “government bonds” rather than a specific rating6. Ryan Detrick, the chief market strategist with Carson Group, highlighted this change, stating, “So even if Moody’s downgrades, it’s not going to force sales from this perspective”7.

In Moody’s most recent credit opinion on the sovereign rating, the agency maintained its Aaa rating and stable outlook, indicating a low likelihood of a new rating in the medium term8. Moody’s did not provide any further comments, referring to its latest credit opinion as a reflection of its current thinking on the U.S. sovereign credit profile9.

Factors Behind Moody’s Triple-A U.S. Rating

Moody’s triple-A rating for the United States is based on several factors. In July, Moody’s highlighted the country’s “exceptional economic strength,” high governance strength, and the central role of the U.S. dollar and U.S. Treasuries in the global financial system10. These factors counterbalance the agency’s expectation of a weakening fiscal strength.

Potential Triggers for a Moody’s Downgrade

Moody’s could change its outlook and eventually its rating if policymakers fail to address the growing fiscal challenges in the coming years. This could involve either increasing government revenues or reducing mandatory spending11. In addition, a “deterioration in the quality of legislative and judicial institutions or monetary and macroeconomic policy effectiveness” could also impact the sovereign rating12.

What About the Debt Crisis?

Moody’s previously stated that it would have downgraded the sovereign rating if the U.S. had missed a payment on its debt. However, the agency remained confident that a deal would have been reached in advance of the so-called X date13. In its latest credit opinion, Moody’s expressed confidence in the strength of U.S. institutions and noted the effectiveness of monetary and macroeconomic policies based on historical evidence14. Nevertheless, it highlighted that certain aspects of policymaking, particularly fiscal policy effectiveness, are less robust compared to other Aaa-rated peers. Moody’s expressed skepticism about whether the U.S. legislative and executive branches would undertake the necessary policy shifts to address rising fiscal pressures, given the increasingly polarized political dynamics in recent years1516.

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While Moody’s remains confident in the current state of the U.S. sovereign rating, investors continue to monitor potential downgrades and their impact on the financial markets. For now, there is no immediate concern, but careful observation and anticipation of future developments are warranted1718.

  1. Source: Reuters – “FACTBOX-Moody’s is last of three big rating agencies with triple-A United States credit rating” – https://www.reuters.com/article/usa-debt-moodys-factbox-idAFKBN2F30BU↩︎

  2. Source: Reuters – “FACTBOX-Moody’s is last of three big rating agencies with triple-A United States credit rating” – https://www.reuters.com/article/usa-debt-moodys-factbox-idAFKBN2F30BU↩︎

  3. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  4. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  5. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  6. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  7. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  8. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  9. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  10. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  11. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  12. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  13. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  14. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  15. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

  16. Source: Reuters – “Moody’s raises red flag over US fiscal outlook” – https://www.reuters.com/business/moodys-raises-red-flag-over-us-fiscal-outlook-2021-07-19/↩︎

  17. Source: Reuters – “FACTBOX-Moody’s is last of three big rating agencies with triple-A United States credit rating” – https://www.reuters.com/article/usa-debt-moodys-factbox-idAFKBN2F30BU↩︎

  18. Source: Reuters – “Explainer: Why a U.S. credit rating downgrade may prove less damaging than it sounds” – https://www.reuters.com/markets/us/explainer-why-us-credit-rating-downgrade-may-prove-less-damaging-than-it-sounds-2021-08-04/↩︎

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