Moody’s Downgrades United States Credit Rating, Citing Rising Government Debt and Deficits

Moody’s Investors Service has downgraded the sovereign credit rating of the United States, citing a sustained increase in federal debt levels and rising interest costs. The credit rating was cut by one notch from Aaa to Aa1, removing the U.S. from the agency’s highest credit tier for the first time.

Moody’s, the last of the three major rating agencies to maintain a top-tier rating for the U.S., now joins Standard & Poor’s and Fitch, both of which downgraded the U.S. in 2011 and 2023, respectively.

“This one-notch downgrade on our 21-notch rating scale 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,” Moody’s said in a statement.

Higher Risk, Higher Yields

The downgrade could have wider implications for financial markets. A lower credit rating may prompt investors to demand higher yields to compensate for perceived risk, potentially raising borrowing costs for the U.S. government.

In after-hours trading, the yield on the benchmark 10-year Treasury note rose 3 basis points to 4.48%, while the iShares 20+ Year Treasury Bond ETF dropped roughly 1%. The SPDR S&P 500 ETF Trust, which tracks U.S. equities, fell 0.4% in the wake of the news.

“Here’s a major rating agency calling out that the U.S. has strained debts and deficits,” said Peter Boockvar, Chief Investment Officer at Bleakley Financial Group. “It’s symbolic, but it adds pressure on investor confidence.”

Persistent Fiscal Challenges

Moody’s cited growing concern over the lack of long-term fiscal reforms in Washington. It noted that successive administrations and Congress have failed to reverse the trajectory of large budget deficits and mounting interest payments.

“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” the agency warned.

The U.S. is already running a fiscal deficit of $1.05 trillion for the current budget year, a 13% increase compared to the previous year. Rising interest rates and an expanding debt load have fueled concerns about the sustainability of federal borrowing.

Debt Burden to Rise

In its projection, Moody’s warned that if the 2017 Tax Cuts and Jobs Act is extended — its base case scenario — the federal primary deficit (excluding interest payments) could grow by $4 trillion over the next decade.

By 2035, Moody’s expects the U.S. federal debt burden to reach 134% of GDP, compared to 98% in 2024, driven by rising entitlement spending, elevated interest payments, and stagnant revenue growth.

Political Gridlock and Policy Risks

The downgrade follows renewed political impasse in Washington, with the House Budget Committee, led by Republicans, rejecting a broad tax cut proposal from President Donald Trump’s administration.

Meanwhile, foreign demand for U.S. Treasurys has softened, even as the U.S. continues to rely on frequent refinancing of an expanding debt stock. Analysts warn that additional policy shifts, including Trump’s high tariffs on imports, could further reduce the appeal of U.S. assets.

“This will make next week interesting,” said Fred Hickey, editor of The High-Tech Strategist. “Expect the value of bonds and the dollar to fall, and gold prices to rise.”

Moody’s first assigned an official credit rating to U.S. sovereign debt in 1993, though it had informally given the country a top-tier ceiling rating since 1949. Friday’s downgrade is being viewed as a symbolic and material warning that the U.S. fiscal path is no longer immune from scrutiny.