17.05.25 - Next Trigger - US debt
The US loses its last AAA credit rating. Yesterday evening, after market close, Moody’s announced the downgrade of the United States' sovereign credit rating, citing the growing burden of financing the federal deficit and the rising cost of rolling over existing debt amid high interest rates.
This move marks the end of an era: Moody’s had been the last of the “Big Three” rating agencies still holding the US at AAA (best Now it aligns with its peers—Standard & Poor’s cut the rating to AA+ back in August 2011, and Fitch followed in August 2023 with the same downgrade.
AAA rating: is the highest possible credit rating assigned by rating agencies like Moody’s, S&P, or Fitch. It signals that a country (or company) has an extremely strong ability to repay its debt, with minimal risk of default. In simple terms, it's like a perfect credit score for governments, indicating top-tier financial reliability and trustworthiness in global markets.
Markets: markets are closed - however seen, after-hours trading already reflected some nervousness with futures down and interest rates up, US dollar down while gold price moved higher. Crypto prices fall during weekend trading.
My view: The timing of Moody’s downgrade, just after market close and ahead of the weekend, is no coincidence. Releasing the decision late on a Friday likely aims to avoid an immediate, sharp market reaction. Investors now have the weekend to digest the news, with the first real test coming Sunday night when futures trading resumes.
The US is running a massive budget deficit as interest costs for Treasury debt continued to rise due to a combination of higher rates and more principal debt to finance. A scenario which is not sustainable and wich can not run endlessly.
Moody’s was the final holdout. With this move, the US has now lost its AAA rating from all major rating agencies. I still well remember the downgrade by S&P on August 1st, 2011, during Switzerland’s National Day and Swiss stock market closed, my options not tradable and worthless the next day, as global financial markets tumbled and investor confidence took a serious hit.
While today’s downgrade may not trigger the same level of panic in the short-term, it could very well disrupt the current wave of market euphoria. Investor sentiment has already shown signs of fragility, especially in April, when a broad sell-off in US Treasuries causing higher yields and a weaker dollar, raised fresh concerns about fiscal discipline. With this downgrade reinforcing those fears, markets may open next week in a far more cautious and volatile tone.
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