Moody’s, the last of the major credit rating agencies to downgrade the US credit rating, lowered the United States’ sovereign credit rating by one notch to Aa1 from Aaa. In August 2011, Standard & Poor’s downgraded the US’s credit rating, followed by Fitch Ratings cut in August 2023, citing fiscal deficits and political standoffs over the debt ceiling. With Donald Trump returning to office in 2025 and proposing aggressive tax cuts alongside tariffs with increased defence and infrastructure spending, budgetary and market uncertainty has intensified.
US Implications
Moody’s decision to downgrade the U.S credit rating is expected to have adverse effects on the American economy in the short and long term. Moody’s cited similar reasons to Standard and Poor’s downgrade decision in 2011, both of which concerned the increase in government debt and interest costs as reasons for adjustment. The US’s deteriorating fiscal position is evident, given that three major rating agencies have stripped the US of its AAA rating three times in the past 15 years. However, this time around, there are distinct short- and long-term implications on the US economy that warrant attention.
An immediate concern for the US is the market reaction to Moody’s downgrade. In the short term, we may see volatility in stock and bond markets as investor confidence is shaken. Sovereign credit rating downgrades often trigger market volatility, as investors reevaluate risk profiles across different asset classes. There are also concerns that Moody’s downgrade will have an immediate effect on interest rates for government debt due to perceived higher risk. This emphasises concerns about the nation’s unsustainable fiscal trajectory, as evidenced by immediate market reactions where stock prices fell and long-term interest rates spiked, with the yield on the U.S. 30-year Treasury climbing above 5%.
Source: Forbes
Over the long term, Moody’s downgrade could have broader structural implications. While the US credit rating remains relatively high, even a slight downgrade suggests an increased risk of default. This reduction in investor confidence may lead to greater caution when lending to the federal government, thereby increasing borrowing costs in the long term. According to Katie Klingensmith, chief investment strategist at Edelman Financial Engines, higher borrowing costs can also heighten inflation risks. If a country is seen as being likely to default on their debt, its creditors will demand higher interest rates in exchange which may potentially lead to an “uptick” in inflation. Moody’s decision also has implications on the US fiscal policy. Bloomberg strategist Simon Flint believes this downgrade highlights the growing pressure from ‘ongoing fiscal slippage’ and also signals investors’ concerns about the US government’s growing debt and fiscal management highlighting the urgency of addressing long-term fiscal imbalances.
Global opportunities
The recent downgrade of the U.S. credit rating is reverberating across the globe, prompting investors to reconsider where they allocate capital. As doubts emerge around the long-assumed safety of U.S. Treasuries, some regions are positioning themselves to benefit, particularly in emerging Asian markets.
According to Reuters, Asia could outpace Europe as a key beneficiary of capital flight from U.S. assets. The region’s comparatively low debt burdens and resilient economic growth make it an appealing alternative. Investors are increasingly drawn to the region’s government bonds, as yields in countries like Indonesia, India, and Vietnam remain attractive relative to their risk. With the downgrade casting doubt on the long-term reliability of U.S. fiscal management, Asia’s financial markets may see stronger foreign inflows, potentially appreciating local currencies and boosting capital formation.
Meanwhile, emerging economies like the Philippines are also expected to gain ground. As BusinessWorld reports, the downgrade may drive investors to seek yield in non-dollar assets, leading to increased demand for Philippine equities and bonds. This shift not only supports the peso but also offers a lower cost of borrowing for local businesses. However, such benefits come with caveats: increased exposure to volatile capital flows and the risk of sudden reversals if global sentiment shifts.
European markets, on the other hand, are reacting cautiously. While countries like Germany may benefit from a flight to safety, those with elevated debt levels could face growing scrutiny. According to Allianz Global Investors, the downgrade serves as a stark reminder of the broader risks facing developed economies with unsustainable fiscal paths.
Overall, while the U.S. downgrade signals uncertainty for traditional safe-haven assets, it is also a pivotal moment for emerging markets to assert their role in the global financial ecosystem.
Implications on retail investors and investing strategy
For retail investors, the emerging problem is within their cost of borrowing. Keeping up with interest rates amid the Moody’s downgrade. The implications are significant. In the short term, U.S. Treasury yields have remained elevated, with 2-year notes yielding above 5% as of May 2025 . While this boosts returns on short-term investments, such as Treasury bills and money market funds, it also increases volatility in bond prices and raises borrowing costs across the economy. Johnson, a member of CNBC’s, said, “A country represents a bigger credit risk; the creditors will demand to be compensated with higher interest rates.” This implies potential surges in consumers’ borrowing costs for mortgages, credit cards, and personal loans.
Source: Guardian
Given these risks, many retail investors are diversifying into alternative assets, which is an ideal way to survive in this highly volatile market. High-grade corporate bonds, inflation-protected securities (TIPS), and dividend-paying stocks offer income with varying levels of exposure to interest rate risk. Others are looking at gold, REITs, or even digital assets like Bitcoin, which some view as hedges against fiscal instability. Specifically for Australian investors, financial products such as VanEck’s Australian Long Short Complex ETF offer strategies that can profit from both rising and falling markets. These ETFs navigate market volatility, offering potential for enhanced returns in unstable markets. REITs remain a solid foundation for investors seeking income-generating assets as opposed to traditional fixed-income assets. They offer exposure to property markets without the need to own physical properties. REITs provide regular dividend income and potential capital appreciation, making them attractive in uncertain global economic times.
Conclusion
With the last of the 3 major credit rating agencies downgrading US credit away from the AAA rating the looming problem with the continual rise in US debt has become more concerning. Short term concerns warrant consideration of other markets particularly opportunities in Asia as a potential nest for investing, as Trump’s policies appear to further US debt in the long term. Though for the ordinary individual it is unlikely to affect majorly, it presents a signal for retail investors to potentially seek alternatives to weather volatility and US debts concerns. As no signs of the rating in US bonds reverting to the Aaa status or US debt shrinking, it is possible a long-term deterioration of this rating can persist if US decision makers defer the issue surrounding the superpower’s debt.
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
