Treasury Yields Spike After Moody’s Downgrades US Credit Rating

Moody’s credit downgrade is understandable, ‘but the time is questionable,’ says Bob Lang, founder and chief options analyst at Explosive Options.

A sign for Moody's rating agency at the company headquarters in New York City. Emmanuel Dunand/AFP via Getty Images

Yields on U.S. Treasury securities soared on May 19 after Moody’s downgraded the United States’s long-term credit rating.

Treasury yields were up across the board, with the benchmark 10-year yield firming above 4.52 percent.

The 20- and 30-year Treasury yields reached 5 percent for the first time since the middle of January.

Treasury yields and bond prices have an inverse relationship: Higher demand drives bond prices up and yields down, while lower demand results in falling prices and rising yields.

Long-term Treasury yields are crucial gauges for consumer borrowing costs, as loans for automobiles and homes track these interest rates.

Financial markets were responding to Moody’s May 16 decision to lower the U.S. credit rating from Aaa—the highest possible score—to Aa1. Moody’s had been the only firm to maintain the United States’s high rating, and now it joins Fitch and Standard & Poor’s.

The rating agency pointed to the federal government’s deteriorating fiscal health, referencing burdensome debt-servicing costs and the high cost of rolling over current debt in a high-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 analysts said in a statement.

Bob Lang, the founder and chief options analyst at Explosive Options, says the lower rating was understandable, though “the time is questionable.”

“But it is what it is,” Lang said in a note emailed to The Epoch Times.

The White House shrugged off the single-notch downgrade.

“I think that Moody’s is a lagging indicator,” said Treasury Secretary Scott Bessent in an interview with NBC’s ”Meet the Press“ on May 18. “I think that’s what everyone thinks of credit agencies.”

Bessent attributed the Moody’s move to a reflection of the previous administration’s spending policies.

“Just like [Transportation Secretary] Sean Duffy said with our air traffic control system, we didn’t get here in the past 100 days,” Bessent said.

“It’s the Biden administration and the spending that we have seen over the past four years.

“Interest rates are on the move and rising with the debt downgrade, though the panic seen in the bond market is not quite palpable.”

U.S. stocks were down sharply at the opening bell, but have pared most of their losses.

The blue-chip Dow Jones Industrial Average was flat, while the tech-heavy Nasdaq Composite Index and the broader S&P 500 Index were down by about 0.3 percent.

The U.S. dollar index, a measure of the greenback against a weighted basket of currencies including the Japanese yen and British pound, fell by more than 0.7 percent to kick off the trading week. The index is down 7.5 percent year to date.

Renewed Focus on US Assets

In the wake of President Donald Trump’s sweeping U.S. tariffs, U.S. and foreign investors’ concerns surrounding the U.S. dollar and Treasury securities were in focus.

While Treasury yields tanked in the 48 hours after the president’s long-awaited April 2 tariffs announcement, they rocketed later and have remained elevated since. Market watchers and policymakers speculated that investors were rotating out of U.S. assets and turning to alternatives, particularly Europe, which resurrected the idea of a “Europhoria.”

In an April 11 interview with CNBC’s “Squawk Box,“ Minneapolis Federal Reserve President Neel Kashkari stated that the sliding dollar and rising bond yields lent ”more credibility to the story of investor preferences shifting.”

“Investors around the world have viewed America as the best place to invest, and if that’s true, we will have a trade deficit. So now one of the ways that expresses itself is in lower yields across asset classes in America,” Kashkari said.

“If the trade deficit is going to go down, it could be that investors are saying, OK, America no longer is the most attractive place in the world to invest, and then you would expect to see bond yields go up.”

Treasury data indicates that foreign demand for U.S. debt has been a source of strength for the past year.

According to the latest Treasury International Capital report, released on May 16, foreign holdings of U.S. government bonds topped a record high of $9 trillion in March. However, this could be a lagging indicator as volatility in the Treasury market occurred in April.

Torsten Slok, chief economist at Apollo Wealth Management, says auction data could suggest waning foreign participation.

“Indirect bidding in Treasury auctions refers to bids submitted on behalf of foreign institutions. These bidders don’t participate directly, but instead have their bids placed by intermediaries—hence ‘indirect,’” Slok said in a note emailed to The Epoch Times.

“Looking at foreign participation in 30-year Treasury auctions shows a downward trend in recent months.”

Still, the 30-year $33 billion auction resulted in foreign investors purchasing more than 70 percent of the available supply.

“Understandably, the TIC [Treasury International Capital] data covering events in April will be eagerly awaited when it is released in mid-June,” ING strategists said in a May 19 note.

Investors will eagerly monitor the conclusion of the May 21 auction of $16 billion worth of 20-year U.S. Treasury securities.

This week will be light on the data, with much of the focus on speeches by various Federal Reserve officials, including Kashkari, Fed Chair Jerome Powell, and Fed Vice Chair Philip Jefferson.