Category: US/Midday Session Brief

Moody’s Ratings downgraded the United States’ sovereign credit rating from its highest level, Aaa, to Aa1. The downgrade is attributed to the increasing costs associated with refinancing existing debt amid rising interest rates and the growing challenge of funding the federal government’s budget deficit.

The rating agency said, “This one-notch downgrade on our 21-notch rating scale reflects the gain in government debt and interest payment ratios over a decade to levels significantly higher than similarly rated sovereigns.”.

The decision to reduce the United States’ credit profile will, at the very least, increase the yield to purchase US Treasury debt to reflect greater risk. It may also reduce the appetite for owning US stocks and other assets.

Major credit rating agencies, however, still assign the United States the second-highest possible rating. In post-hours trading, the yield on the benchmark 10-year Treasury note increased 3 basis points to 4.48 percent

Moody’s, which has been a stalwart in maintaining the highest credit rating for US sovereign debt, now aligns the 116-year-old agency with its competitors. Fitch Ratings lowered the U.S. rating from AAA to AA+.

The AAA rating was changed to AA+. According to a statement from Moody’s analysts, “Successful US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.”.

“We don’t think the current fiscal proposals will lead to significant multi-year reductions in mandatory spending and deficits. Because of higher interest rates and more principal debt to finance, interest costs for Treasury debt have continued to rise, resulting in a massive budget deficit for the US.

The fiscal deficit for the year that started on October 1st is already $1.05 trillion, which is 13% more than it was a year ago. A portion of the imbalance was reduced last month thanks to tariff revenue.

The dollar dropped Friday along with US Treasury yields as bets on additional rate cuts this year were solidified by negative surprises in US economic data this week. Although the dollar dropped 0.1 percent against a basket of currencies to 100 pc, its sharp 1 pc increase on Monday put it on track for a slight weekly gain of 0.3 percent.

Markets are now pricing in about 56 basis points of Fed cuts by December, up from 49 basis points the day before.

The benchmark 10-year US Treasury yield continued to decline 7 basis points overnight, closing slightly lower at 4 points 4413 percent. The yield for two years dropped 1 basis point to 3.9608 percent.
Fed Chair Jerome Powell stated that policymakers believe their current monetary policy approach needs to reevaluate the key components related to inflation and jobs.

However, the excitement quickly subsided, leaving currencies trading sideways. The news that Washington and Seoul had discussed the dollar/won market earlier this month caused the dollar to plunge sharply against the South Korean won for two straight days, causing most of the foreign exchange market’s activity.

Asian currencies’ depreciation against the dollar has long been viewed as a sign that President Trump wants to see the dollar decline, adding pressure on other governments to allow their currencies to gain value in trade talks.