On May 16, Moody’s officially lowered its credit rating on U.S. government debt to Aa1, its second-highest grade. With the national debt climbing past $36 trillion, the move isn’t exactly shocking — but it’s noteworthy because Moody’s was the last of the big three ratings agencies to act. S&P downgraded the U.S. back in 2011, and Fitch followed in 2023.
As expected, the downgrade made headlines, but the bond market’s response? Much more subdued.
📉 Bond Market Reaction: A Shrug, Not a Panic
While the media buzzed, long-term Treasury yields barely flinched. The 10-year Treasury went from 4.43% to 4.51% in the eight days after the downgrade — a move, but not a surge. The 30-year yield moved a bit more, from 4.89% to 5.04%, but again, nothing dramatic.
What’s getting more attention is the widening spread between the 30-year and 10-year yields, now sitting at over 50 basis points — more than double the 2024 average. But even that gap is not unprecedented. Prior to the pandemic, the average spread was 44 bps, so we’re not in uncharted territory.
🤔 What’s Driving the Market?
It’s tough to untangle cause and effect here. The Federal Reserve has signaled that rate cuts aren’t coming anytime soon, which may have had just as much influence as the downgrade itself. We’ve seen this play out before: the U.S. experienced similar downgrades under the Obama and Biden administrations without major fallout.
Still, this latest action is stirring up familiar political finger-pointing, with Moody’s calling out Republican efforts to extend the 2017 tax cuts as fiscally reckless. The concern? More tax cuts could mean larger deficits, leading to higher borrowing costs, which then fuels even bigger deficits — a classic snowball effect.
🧾 Is That Really What’s Happening?
Here’s the catch: much of the current deficit picture isn’t being driven by new policy — it’s the result of existing commitments and elevated spending, especially in the post-COVID era. Even with unemployment under 4%, spending levels remained historically high, pushing annual deficits into the $2 trillion range.
The recently passed “Big Beautiful Bill” (yes, that’s the actual name) attempts to curb some of that. According to the nonpartisan Tax Foundation, the bill could reduce the deficit by $1.9 trillion over the next decade, especially compared to simply extending previous tax cuts. It combines projected revenue increases with reforms to entitlement programs like Medicaid.
Add to that some new tariffs and proposed deep cuts to non-defense discretionary spending for Fiscal Year 2026 (a 32% reduction from Congressional Budget Office projections), and we may be looking at a slightly leaner federal budget in the near term.
🧮 Perspective: The Big Picture
Let’s be clear — the U.S. is not in a great fiscal position. Even with record tax receipts, spending continues to outpace revenue dramatically. In 2007, the federal deficit was just 6% of total government spending. By 2019, it was 22%, and now it’s around 27%. That’s like running a household where over a quarter of your expenses are going on a credit card — with no plan to pay it off.
🟢 The Silver Lining
The U.S. doesn’t necessarily need a surplus to manage its debt — it just needs debt growth to stay below the growth of the broader economy. If we can rein in spending, the private sector benefits from increased capital availability, potentially driving growth, revenue, and — eventually — smaller deficits.
We’ve seen this play out before. During the Clinton administration, deficit reduction led to economic expansion and improved fiscal stability. Now, with the Senate set to debate the bill, the question is: Can we do it again?