Moody blues
Treasury yields, risk premia and institutional quality
Moody's was very late to the US sovereign credit rating downgrade party, with S&P having made that decision in 2011 and Fitch in 2013. The substance of the decision was less important than the timing, coinciding with one of the biggest global policy shocks since the 1930s and a Republican budget proposal and an omnibus bill that implies a significant further deterioration in the US fiscal position. The US downgrade leaves Australia, Canada, Denmark, Germany, Netherlands, New Zealand, Norway, Singapore, Sweden, and Switzerland defining the remaining AAA-rated sovereign credit space.
Sovereign credit ratings are ultimately judgments on institutions and state capacity as much as underlying fiscal strength and debt dynamics, which would otherwise further cripple the US rating. S&P famously called BS on US political institutions back in 2011 and copped a lot of political and regulatory flack for its trouble. As David Levey, former head of sovereign ratings at Moody's notes in his Substack, S&P was viewed as getting ahead of itself back in 2011 but looks more prescient now. Levey concurs with the latest Moody's ratings action:
The downgrade is essentially a signal that the trajectory of debt expected for the U.S. has reached explosive levels, primarily because of the rising costs of entitlement programs for seniors caused by population aging, as well as the rising interest costs added on as the debt grows. In my view, Moody's is correct to conclude that, from today's vantage point, the debt burden has finally reached the point of more than offsetting the continuing special attractiveness of U.S. Treasuries as the world's premier "safe asset."