US stocks plunged sharply Monday after Moody’s lowered the country’s rating. This triggered a surge in Treasury rates and renewed pressure on equity market.
The Dow Jones Industrial Average fell by 130 points or 0.3%. The S&P dropped 0.58% while the Nasdaq Composite was the worst with a 0.74% decline.
Moody’s lowered the US credit rating from Aaa (the highest) to Aa1 (the lowest) on Friday. The reason given was the growing fiscal deficits, and the difficulty of refinancing the debt due to high interest rates.
Moody’s has now joined other major rating agencies who had already reduced the US’s top-tier rating.
Fitch Ratings lowered the United States long-term credit ratings from AAA to AA+ in August 2023. They cited the persistent political brinkmanship regarding the debt ceiling, and the growing fiscal instability.
This move follows S&P’s previous downgrade in 2011 when it was the first major agency that cut the US rating, from AAA to AA+.
The downgrade had a significant impact on bond prices. It pushed yields higher, just as markets continue to be sensitive to economic headwinds. This includes the fallout of President Donald Trump’s policies regarding tariffs.
The rising yields dampened sentiment further, especially in rate sensitive sectors like technology.
Investors pulled back from growth companies most vulnerable to an economic slowdown.
The market reversal came after a strong Wall Street week, where optimism had returned following the US-China temporary agreement to rollback tariffs.
The Nasdaq Composite surged more than 7% last weekend, the S&P 500 gained over 5% in a 5-day rally, and Dow rose over 3%.
Bond yields jump following downgrade
US Treasury yields spiked Monday after Moody’s lowered the country’s rating. This prompted a widespread selloff of government bonds, pushing rates to levels which have recently pressed financial markets.
The 30-year Treasury yield increased 13 basis points, to 5.03%. The 10-year Treasury yield rose 11 basis to 4.552%.
The yield on the 2-year bond increased by 4 basis points to 4.021%.
Investor anxiety increased after Moody’s downgraded the US credit rating on Friday from Aaa (excellent) to Aa1. The company cited the growing fiscal burden as well as the elevated costs of servicing the debt in an environment with high interest rates.
The agency stated that “this one-notch downgrade reflects the significant increase in government debt and interest payments over the past decade to levels that are higher than similar rated sovereigns.”
Since 1949, Moody’s has maintained an Aaa “country ceiling rating” for the US.
The move aligns the US with the other major rating agencies that had already placed it at their respective second highest ratings.
This post US stocks slip into the red on Monday: Dow drops 100 points, S&P falls 0.5% appeared initially on The ICD
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