U.S. Treasury yields surged on Monday after Moody’s Investors Service downgraded the country’s credit rating for the first time in decades, sending tremors through the bond market and reigniting debate about America’s worsening fiscal trajectory.
The move came just as House Republicans advanced a Trump-backed tax and spending bill that could add trillions more to the national deficit.
The yield on the 30-year Treasury note jumped 13 basis points to 5.03%, breaking through a psychological threshold that has rattled investors in recent weeks. The 10-year yield climbed 11 basis points to 4.552%, while the 2-year yield rose by 4 basis points to 4.021%. Yields move inversely to prices, meaning the spike reflected a sharp sell-off in U.S. government bonds.
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The reaction came swiftly after Moody’s downgraded the U.S. sovereign rating from Aaa to Aa1 on Friday — the first time it has lowered the country’s rating since it began assigning one in 1949. It cited the government’s chronic inability to rein in its budget deficits and the mounting costs of servicing its debt in a high-interest rate environment.
“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.
The agency said the downgrade also reflects growing doubts over whether any meaningful fiscal reform will emerge from Washington in the foreseeable future.
Moody’s had been the last of the three major ratings firms to keep the U.S. at its top rating, after S&P stripped the country of its AAA status in 2011 and Fitch followed suit earlier this year. Now, all three have relegated the United States to second-tier credit standing — a symbolic blow to America’s long-standing position as the world’s most trusted borrower.
Deutsche Bank analysts called the downgrade “a major symbolic move,” noting that Moody’s had held the line for over seven decades.
But symbolism aside, the timing of the downgrade has concrete implications. It came just as House Republicans pushed through the Trump-endorsed tax and spending package in the House Budget Committee. The bill, which aims to extend tax cuts from 2017 and introduce new tariff policies, is estimated to deepen the deficit by trillions over the next decade.
Moody’s took direct aim at that plan in its downgrade report, warning that “successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.” The agency expressed little faith that current legislative proposals, including those advanced by House Republicans, would meaningfully reduce spending or stabilize debt.
Bank of America economist Aditya Bhave echoed those concerns, writing in a note, “With tax cuts and tariffs hanging in the balance, Moody’s appears to be sending a message that it thinks these policy changes will, on net, put the US on an even worse fiscal trajectory. That is, tariff revenues won’t fully offset the cost of the proposed tax bill. We agree.”
The downgrade and the spike in yields have also shaken confidence in U.S. Treasurys as a safe haven for global investors. For decades, U.S. government debt has been considered the gold standard in global finance — a refuge in times of uncertainty. But with interest payments ballooning and political gridlock worsening, investors are beginning to ask whether that assumption still holds.
Even as debt issuance climbs, foreign demand is showing signs of strain. The Federal Reserve, which had long played a stabilizing role by purchasing Treasurys in the secondary market, has pulled back amid efforts to tighten monetary policy and curb inflation.
Eyes are now on the Fed. Central bank officials — including Atlanta Fed President Raphael Bostic, New York Fed President John Williams, and Dallas Fed President Lorie Logan — are expected to speak on Monday. Markets are watching closely for any shift in tone or hints about how the central bank views the risks stemming from fiscal policy and bond market volatility.
The downgrade also throws fresh scrutiny on the political calculus behind the Republican bill. Trump allies argue that making the 2017 tax cuts permanent is essential to sustaining economic growth and reindustrializing America through tariffs on foreign competitors. But critics say the plan is fiscally reckless, ignoring the weight of soaring debt and the implications of rising borrowing costs.
The national debt now exceeds $34 trillion, and annual interest payments on that debt are approaching $1 trillion, surpassing what the country spends on defense or Medicare. With no bipartisan agreement in sight, analysts warn that America’s fiscal credibility may face even greater tests in the months ahead.