Outlook on US Debt Now Negative at Moody’s, Government Shutdown Could Carry Yield Implications

Moody’s now maintains a “negative” outlook on US sovereign debt, compounding a credit rating downgrade from Fitch Ratings in August, as well as growing concerns regarding the sustainability of US bond issuance. Annual interest payments on the debt issued by the US Treasury Department has grown at a pace unprecedented since the 1940s this year, bolstered by rising interest rates and an increasingly large budget deficit. Tax receipts have not yet increased to keep pace with US expenditures on interest and fiscal policy, which is making the prospect of owning long-dated US Treasuries a more risk-intensive prospect. 

Concerns regarding the pace of this issuance have worsened the situation, putting more upward pressure on yields as some investors – particularly those classified as foreign official holders of US debt – may feel the need to re-assess the risk associated with Treasury bonds. Moody’s rationale for its negative outlook also included concerns about “political polarization” in the US Congress, which is once again struggling to fight off a government shutdown with no federal budget in sight.

Related ETFs: iShares 20+ Year Treasury Bond ETF (TLT), ProShares Short 20+ Year Treasury (TBF)

On Friday evening, Moody’s shifted its outlook on the US’s sovereign credit rating from “stable” to “negative”, putting the country’s last AAA designation among the big three ratings agencies at risk of an eventual downgrade. It was less than four months ago that Fitch Ratings cut their grading of US debt to AA+, compounding a similar downgrade from S&P in 2011. By enacting those downgrades, Fitch and S&P see the US’s bonds as less creditworthy than those issued by the nine countries who still maintain the highest ranking possible among each of the big three. That list includes Germany, Denmark, the Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore, and Australia.

Moody’s warning on the US’s creditworthiness cited increasing “downside risks to the [US’s] fiscal strength”, “weakening debt affordability”, and “continued political polarization” in Congress. The first two elements are especially pressing, as the interest due on the US’s constantly expanding debt load is growing more rapidly in 2023 than at any other time since World War II. Q3 data from the Bureau of Economic Analysis (BEA) shows that the YoY rate of growth on annualized debt expenditures has surpassed 30% in each quarter of 2023 thus far – an unprecedented pace in data that goes back to 1948. That has pushed the US’s annual spend on interest payments to…