TradingKey - Following Moody’s downgrade of the U.S. sovereign credit rating last Friday, global investor concerns over the sustainability of U.S. fiscal policy have triggered a sharp rise in market anxiety. On Monday, May 19, the VIX Volatility Index surged by over 15%.

At the time of writing, the VIX index stood at 19.32, up 12.06%. The index had previously spiked to a historic high of 60 in April — just before Trump’s reciprocal tariffs took effect — before falling back as trade negotiations progressed.

The VIX index reflects investors’ expectations for volatility in the S&P 500 over the next 30 trading days. A higher reading signals increased uncertainty and perceived risk in financial markets.

This surge in the VIX was primarily driven by Moody’s decision to downgrade the U.S. credit rating, stripping the country of its last AAA rating. The downgrade was justified by rising debt levels and concerns that the U.S. fiscal deficit may continue to deteriorate .

With the loss of the top-tier credit rating, investors in U.S. Treasuries will now demand higher yields to compensate for the increased risk — particularly in long-term bonds. On May 19, the yield on the 30-year Treasury rose to 5.03%, the highest level since October 2023– marking an unusual development amid a Fed easing cycle that has already seen three rate cuts.

If bond yields continue to climb, the cost and difficulty of U.S. borrowing will rise, potentially pushing the nation’s fiscal challenges into a vicious cycle of unsustainability. 

Analysts at J.P. Morgan warned that this serves as a clear reminder: the longer fiscal problems are delayed, the more costly the consequences will be.

In pre-market trading, major U.S. equity futures were broadly lower, with S&P 500 futures down more than 1%.

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