Moody’s recent downgrade of the U.S. credit rating—from Aaa to Aa1—adds fuel to a growing fire of fiscal instability. While not unprecedented, the downgrade follows in the footsteps of prior moves by Fitch and S&P, and comes as national debt exceeds $36 trillion and deficit spending outpaces post-WWII levels.
Despite pledges of austerity, federal spending during the first 100 days of the current administration has surged by more than $220 billion compared to last year. Promised multi-trillion-dollar cuts have largely failed to materialize, and legislative efforts may only worsen the fiscal outlook over the next decade.
What does this mean for investors?
Treasury markets are already flashing warning signs. Over $9 trillion in U.S. debt matures in 2025, forcing a massive refinancing effort. With another $2 trillion in deficits expected, the U.S. Treasury may need to issue more than $10 trillion in new debt this year alone. This raises the risk of crowding out private investment and pushing interest rates higher.
Meanwhile, the Federal Reserve may again be forced to step in—not as lender of last resort, but buyer of last resort—raising the specter of renewed debt monetization. And while the U.S. dollar retains global reserve status for now, growing debt and trade tensions could further fuel the slow-burning trend of global de-dollarization.
In this environment, volatility is likely to remain elevated across equity and fixed income markets. Investors are rethinking allocations, focusing on intermediate-term Treasuries and revisiting inflation hedges.
What Is Included In This Report
- Why Moody's downgraded the U.S. credit rating and how it compares to past agency actions
- The implications of rising government debt, Treasury market volatility, and interest rate risk
- How wealth managers can position portfolios with a focus on intermediate-term bonds
- Insights into the Fed's evolving role and the outlook for debt monetization
- The risk landscape for the U.S. dollar and potential de-dollarization trends
- Why inflationary pressure and policy uncertainty will drive equity market volatility in 2025.
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