US debt downgrade sparks long-term worry, markets stay calm
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Public debt in the United States has reached troubling levels, drawing attention from economists and policymakers. While awareness of the issue is high, current political signals suggest public spending will remain steady or even increase. Despite maintaining a high credit rating, rising debt may lead to higher risk premiums and borrowing costs, according to Dane Smith of State Street Global Advisors.
Last week, Moody’s downgraded the US sovereign rating from AAA to Aa1. The move, though symbolically important, was widely expected and had little impact on markets: 10-year Treasury yields remained stable, and the S&P 500 rose 0.09% the following day—indicating the downgrade was already priced in. Still, the event highlights ongoing fiscal challenges, with US debt now hovering around 120% of GDP.
Unlike in the 2010s, today's higher interest rates are amplifying the cost of debt servicing. Early signals from the new budget debate suggest that debt reduction is not a priority and that high debt levels will persist.
Higher yields could make bonds more attractive relative to equities, reshaping portfolio strategies. At the same time, elevated rates increase corporate borrowing costs, potentially pressuring earnings and widening credit spreads. Moreover, the traditional negative correlation between stocks and bonds—which supports many asset allocation models—may weaken in this new rate environment.
While a medium-to-long-term rate decline remains possible, persistent deficits and mounting debt levels pose significant macroeconomic risks. The downgrade may not have shaken markets, but it reinforces the structural fiscal concerns that will shape investment decisions for years to come.
Last week, Moody’s downgraded the US sovereign rating from AAA to Aa1. The move, though symbolically important, was widely expected and had little impact on markets: 10-year Treasury yields remained stable, and the S&P 500 rose 0.09% the following day—indicating the downgrade was already priced in. Still, the event highlights ongoing fiscal challenges, with US debt now hovering around 120% of GDP.
Unlike in the 2010s, today's higher interest rates are amplifying the cost of debt servicing. Early signals from the new budget debate suggest that debt reduction is not a priority and that high debt levels will persist.
Higher yields could make bonds more attractive relative to equities, reshaping portfolio strategies. At the same time, elevated rates increase corporate borrowing costs, potentially pressuring earnings and widening credit spreads. Moreover, the traditional negative correlation between stocks and bonds—which supports many asset allocation models—may weaken in this new rate environment.
While a medium-to-long-term rate decline remains possible, persistent deficits and mounting debt levels pose significant macroeconomic risks. The downgrade may not have shaken markets, but it reinforces the structural fiscal concerns that will shape investment decisions for years to come.