U.S. Downgrade Then And Now

2025-05-22 16:14:00 ET

Summary

• Normally, when a credit is downgraded, yields rise at the margin and prices drop (relative to other bonds). In August 2011 the reaction was counterintuitive.
• Market reactions were much more muted and different from fourteen years ago.
• There are now other robust markets for sovereign debt, such as Germany and Japan, so the US Treasury as the world’s safe haven has not been abandoned, but it has company.

Moody’s Investors Services downgraded United States debt from Aaa to Aa1 last week, on May 16 ^th (Moody’s has rated US debt Aaa since 1919). While these days you can’t say anything is a certainty, we certainly would not characterize the downgrade as a surprise. This follows the downgrade by Fitch Ratings from AAA to AA+ on August 1, 2023, and more importantly, the downgrade by Standard & Poor’s from AAA to AA+ almost 14 years ago, on August 5, 2011. Market reactions have differed greatly....

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