New York: The US lost its highest credit rating from all three major rating agencies as Moody's downgraded its credit status due to its high debt level and widening budget deficit, which is expected to worsen bond market conditions. Moody's adjusted the long-term US credit rating from 'AAA' to 'Aa1' and altered its outlook from 'negative' to 'stable.'

According to Anadolu Agency - English, the downgrade reflects a significant increase over more than a decade in government debt and interest payment ratios, bringing them to levels significantly higher than those of similarly rated sovereigns. Moody's statement emphasized that the stable outlook considers institutional features, such as the constitutional separation of powers among the three branches of government, which contribute to policy effectiveness over time and remain relatively insensitive to short-term events. Although these institutional arrangements may be tested occasionally, they are expected to remain strong and resilient.

In the coming decade, government revenues are expected to be broadly flat, with larger deficits anticipated, the statement warned. Without adjustments in taxation and spending, mandatory spending in the US, which accounted for about 73% of total spending in 2024, is projected to rise to about 78% by 2035, including interest expenses. If the 2017 tax cuts are extended, the deficit will increase by approximately $4 trillion over the next 10 years.

The annual deficit of the US federal budget is about $2 trillion, equivalent to more than 6% of GDP. For the fiscal year that began on October 1, the budget deficit has already reached $1.05 trillion, marking a 13% increase from the previous year.

Investors are showing caution and are moving away from the dollar as a result of Moody's downgrade of the US credit rating from 'AAA' to 'Aa1.' The US now shares a credit rating similar to smaller economies like Austria and Finland. Following the initial US downgrade in 2011 by S and P Global Ratings, the markets reacted strongly, with the S and P 500 losing 16% of its value in a short time.

The downgrade by Moody's could lead to higher bond yields, raising borrowing costs and suppressing economic growth. With rising national debt and trade tensions initiated during US President Donald Trump's tenure, investors have become more cautious, demanding higher yields on US debt. The US Treasury bond market already faces pressure from rising debt yields and persistently high inflation.

Higher bond yields could impact borrowing costs for companies and consumers reliant on the bond market, negatively affecting the stock market-dependent economy. The US 10-year bond yield is at 4.558%, its highest since the 2008 global financial crisis. A 5% yield on US 10-year bonds is considered a critical threshold by markets. In April, when US Treasury yields approached this level, the US backed down in its trade disputes and suspended additional tariffs on imports.

As bond market concerns grow, the Dollar Index, comparing the US currency to a basket of global currencies, has fallen 6.5% since the year began. The euro has gained about 8% against the dollar during this time. It is projected that the trend of international investors moving away from the dollar will accelerate following the downgrade.

With Moody's decision announced after market closure, the first reaction is anticipated when markets open today. However, after-hours trading on Friday saw the S and P 500 ETF fall by 1%, the US 20+ year Treasury bond ETF drop by 1%, and the ETF tracking gold prices rise by 1%.