After Moody's Downgraded the US Rating, the Voice of "Selling the US" Quietly Emerged on Wall Street Again...

As trade conflicts between the US and the UK, as well as China, have eased somewhat, Wall Street investors' concerns about Trump's tariffs have diminished recently, with US stocks rising for five consecutive days last week and approaching record highs again.

However, just as one wave subsides, another arises. This week, a new obstacle has emerged for US stock investors—this time, it's not about tariffs, but about the US debt outlook.

Moody's Downgrades US Credit Rating

On Friday evening last week, US Eastern Time, Moody's Investors Service announced that it had downgraded the US government's top credit rating from Aaa to Aa1, blaming successive US presidents and members of Congress for the ballooning budget deficit. Moody's stated that there are few signs of the US budget deficit shrinking.

As a result, on Monday morning this week, medium and long-term US Treasuries, US stock index futures, and the US dollar all fell, reflecting investors' growing concerns about the US economic outlook.

Currently, the US Congress is discussing more unfunded tax cuts. However, since US President Trump took office, he has been wielding the "tariff stick" indiscriminately and attempting to overturn the long-standing commercial partnerships the US has established with European countries and Canada, making the US economic outlook appear increasingly bleak.

On Monday this week, the yield on 10-year US Treasuries, after climbing at the end of last Friday, remained largely around 4.5%, reaching 4.515% as of press time, up 7.6 basis points. The yield on 30-year Treasuries rose by 10 basis points, pushing it above 5% to its highest level since November 2023 and close to its historical peak in mid-2007.

As of press time, the S&P 500 futures were down 1.08%, and the Nasdaq 100 futures were down 1.35%.

US Asset Attractiveness May Weaken

Max Gokhman, Deputy Chief Investment Officer at Franklin Templeton Investment Solutions, said, "Given the accelerating pace of unfunded fiscal relief measures, it's not surprising that the US Treasury rating has been downgraded."

"(The US') debt servicing costs will continue to climb as major investors (including sovereign and institutional investors) gradually shift from US Treasuries to other safe-haven assets... Unfortunately, this could trigger a steeper bearish spiral in US Treasury yields, exert further downward pressure on the US dollar, and reduce the attractiveness of the US stock market."

In an earlier report, Wells Fargo strategists Michael Schumacher and Angelo Manolatos told clients that they expected "10-year and 30-year US Treasury yields to rise by an additional 5-10 basis points due to Moody's downgrade."

Although a rise in government bond yields typically boosts a country's currency, for the current US, market concerns about US debt may exacerbate doubts about the US dollar.

Currently, the US dollar index has seen a slight decline in the morning session, currently standing at 100.85, down 0.24%. Meanwhile, media data shows that the sentiment among options traders has reached its most pessimistic level in five years.

In a report to clients, Subadra Rajappa, a strategist at Société Générale, wrote, "Higher long-term bond yields will increase the (US) government's net interest costs and deficit... In the long run, the erosion of the safe-haven status of US Treasuries will affect the US dollar and foreign demand for US Treasuries and other US assets."