MW Investors brace for reaction after Moody's strips U.S. of its top credit rating

By William Watts

Last of major ratings firms strips top rating more than 13 years after S&P was first to downgrade U.S. from triple-A

Just when the stock market had clawed back all the losses sparked by the panic over President Donald Trump's tariff plans, investors face another round of debt-related angst as markets prepared to open Sunday after Moody's Ratings stripped the U.S. government of its last triple-A credit rating.

Strategists warned the move, announced after the market close on Friday, could spark some near-term selling in stocks and Treasurys.

Stocks may be vulnerable to profit-taking after a sharp bounce that erased steep losses that had sent the S&P 500 SPX to the brink of a bear market last month following the April 2 rollout of Trump's tariff plans. Stocks bounced sharply as the administration backtracked on the most severe measures, with the S&P 500 and Dow Jones Industrial Average DJIA last week turning positive for the year to date. The S&P 500 rose 5.3% last week, its biggest weekly gain since April 2020.

"In light of the extended and narrow nature of the advance, this may be the catalyst that sparks a pullback or consolidation," said Cam Hui, who runs the Humble Student of the Markets blog. "It remains to be seen how bearishly the market interprets the downgrade. Stay tuned."

The SPDR S&P 500 Trust SPY, which tracks the index, fell in after-hours trading Friday, while Treasury futures (TY00) also declined.

Moody's on Friday said it had cut the U.S. rating by one notch, to Aa1 from Aaa, and that the move "reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns."

Check out: The U.S. just lost its last pristine credit rating. What that means for markets.

Moody's $(MCO)$ was the last of the major credit-rating firms to strip the U.S. of a triple-A rating.

In August 2011, S&P Global Ratings $(SPGI)$ was the first to take away a triple-A rating from the U.S. amid a debt-limit showdown - something that has since become a frequent occurrence in Washington. The move set off political shockwaves, coming amid a late-summer stock-market selloff tied to the fiscal showdown and a worsening eurozone debt crisis. Treasurys, however, rallied after the S&P downgrade, pulling down yields due to worries over growth.

Fitch Ratings was next in August 2023, with the move coming shortly after the resolution of another debt-limit battle.

The Moody's decision came the same day the House Budget Committee failed to advance a sweeping tax and spending bill that is the centerpiece of President Donald Trump's legislative agenda, underscoring deep divisions within the Republican caucus.

Treasury Secretary Scott Bessent, in a Sunday interview with NBC's "Meet the Press," waved away the downgrade. "I think Moody's is a lagging indicator," he said. "I think that's what everyone thinks of credit agencies."

While investors have long considered the likelihood that Moody's would join S&P and Fitch in downgrading the U.S., the Friday move appeared to catch investors by surprise, said Michael Kramer, founder of Mott Capital, in a note. The reaction in the Treasury market will be crucial, he said.

"Most are dismissing the news as not a big deal, and perhaps it's not. After all, the U.S. has already had two prior downgrades," he wrote.

Still, the timing is sensitive given current negotiations around the Republican-backed tax bill, he said. "The key issue is that this downgrade comes at a moment when term premiums were already rising, potentially adding even more upward pressure."

The yield on the 10-year Treasury note BX:TMUBMUSD10Yrose 6.3 basis points last week to to 4.437%. Yields and debt prices move opposite each other.

-William Watts

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May 18, 2025 16:44 ET (20:44 GMT)

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