Markets steady after U.S. credit downgrade by Moody’s

May 20, 2025 (MLN): Investors showed limited concern over the latest downgrade to the U.S. credit rating, as markets remained largely unchanged in trading.

The Dow Jones Industrial Average gained over 130 points, rising 0.32%, while the S&P 500 edged up 0.09% and the Nasdaq inched higher by 0.02%.

Late Friday, Moody’s downgraded U.S. debt from AAA to Aa1, becoming the third major credit rating agency to take such action.

These agencies assess a nation’s ability to repay debt, but the market response was subdued, as NBC reported.

The yield on the 10-year U.S. Treasury note a key government debt benchmark had risen slightly to 4.46%, still below last month’s peak of 4.59%.

Capital Economics analysts noted that the downgrade had little immediate market impact, echoing past downgrades in 2011 and 2023. They observed only modest movement in debt yields, stating the effects were not substantial.

However, mortgage costs have risen. The average rate on a 30-year fixed-rate mortgage reached 7.04% on Monday, the highest level since April 11, according to Mortgage News Daily.

COO Matthew Graham said this reflected both Friday’s market close and additional weakness seen Monday, though it didn’t shift the broader trend.

Moody’s cited persistent fiscal challenges as the reason for the downgrade, pointing to the government's ongoing difficulty in managing its finances.

The agency noted a failure by successive administrations and Congress to implement long-term fiscal reforms, with large annual deficits and rising interest costs remaining unaddressed.

While the downgrade made headlines, retail investors individuals rather than large institutions continued supporting the market.

A widely used Vanguard investment fund, seen as a barometer for retail activity, remained flat, suggesting minimal selling pressure.

The downgrade did little to change broader concerns.

Historical downgrades haven’t significantly altered U.S. fiscal policy, and independent analysts such as the Congressional Budget Office and Penn Wharton Budget Model have expressed doubts about the effectiveness of President Donald Trump’s proposed spending legislation currently moving through Congress.

JP Morgan CEO Jamie Dimon warned of potential market headwinds, suggesting that the risk of stagflation a mix of recession and inflation may be twice what investors currently expect.

He cautioned that such a scenario could lead to falling corporate earnings.

Despite these warnings, the White House downplayed deficit concerns, citing expected growth from Trump's economic initiatives, ongoing government spending cuts by the Department of Government Efficiency, and revenue generated through tariffs.

Still, skepticism persists. Mike Goosay, Chief Investment Officer at Principal Asset Management, acknowledged the U.S. dollar’s current role as a global reserve currency but highlighted long-term risks.

He warned that if international investors begin questioning America's place in the global system, the real economic consequences may emerge.

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