Bond Market Update: Moody's Tells Investors: 'It's All About The Deficit'

2025-05-19 04:41:00 ET

Summary

• Tariffs are expected to generate $700-800 billion in income for the US, once the negotiations are concluded.
• Interest on Treasury debt is now the largest single line-item expense in the US budget, so the Trump Administration needs to get the FOMC to lower the Fed funds rate.
• Most clients are long and overweight corporate high-grade and high-yield corporate credit and then offset with Treasury (or TLT) positions.

The Moody’s downgrade – the last downgrade from the Aaa level – of U.S. Treasury debt that occurred on Friday, May 16th, 2025, after the market close – was probably not a coincidence given the headlines around the Trump Administration’s tax and budget bill that saw some resistance last week from Republicans in Congress. The fact is there is gamesmanship and negotiations around every major Congressional bill, but Moody’s may have gotten to the point where this seemed like “more of the same” from a spending standpoint, and it was time to act. (Texas Representative Chip Roy’s, (R., Tx) Friday rant carried on the major news networks may have been the final nail in the coffin for Moody’s.)...

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