US bonds have been downgraded by major agencies three times. The first two times US bonds were downgraded, the S&P 500 immediately dropped substantially the next day and in the following days. The first time, however, US Treasuries paradoxically rallied as investors still saw them as the world’s safest asset. The second time, the 10-year Treasury yield climbed to around 4.49% in the immediate aftermath of the downgrade. This increase in yield reflected investor concerns that the downgrade signaled greater fiscal risks, potentially requiring higher returns to compensate for perceived increased risk in holding US government debt.
So far, the downgrade has pushed S&P 500 futures lower by 1.1% at the time of this writing while the yield on the 30-year is hitting new highs as a consequence of the downgrade.
Will the market selloff this time be more mild? Global liquidity is pronounced compared to prior times, tariff resolutions are looking more positive, and the economy and jobs data remain resilient. But record levels of debt, debt interest, and tariff uncertainty remain. Odds seem to favor a selloff first, ask questions later when it comes to stocks. Bitcoin, however, may be more resilient. It held its ground on Aug 1, 2023 after the second downgrade. It was only a few weeks later that fears of a rate hike caused all markets to fall so one might attempt to hold onto bitcoin-related vehicles on which we have reported to members such as MSTR, GBTC, and DEFT, among others unless they hit your sell stops.
Over the weekend after the third downgrade on Friday May 16, 2025, bitcoin actually attempted to rally.
History of downgrades
First downgrade:
Standard & Poors Downgrade Date: August 5, 2011 from 'AAA' to 'AA+'
Market Reaction:
The downgrade triggered significant volatility and a sharp selloff in global stock markets.
On the first trading day after the downgrade (August 8, 2011), the S&P 500 plunged nearly 6.7%, its worst single-day drop since the 2008 financial crisis.
The Dow Jones Industrial Average fell over 630 points, and similar declines occurred in European and Asian markets.
The selloff was driven by fears that the downgrade would raise borrowing costs, undermine confidence in US fiscal management, and threaten the US dollar’s safe-haven status
Second downgrade:
Fitch downgraded the US long-term credit rating from AAA to AA+ on August 1, 2023. The downgrade was attributed to several factors, including:
Expected fiscal deterioration over the next three years
A high and growing government debt burden
Erosion of governance, as reflected in repeated debt limit standoffs and last-minute resolutions in Congress
Fitch specifically cited concerns about the US government’s ability to manage its rising debt, ongoing political gridlock over the debt ceiling, and the lack of a credible plan to stabilize the debt burden. At the time, the US debt-to-GDP ratio was projected to rise to 118.4% by 2025, far above the median for AAA-rated countries.
Third downgrade:
The downgrade of US bonds on May 16, 2025, by Moody’s was driven by several interrelated fiscal and political factors:
Rising Government Debt: Moody’s cited the United States’ escalating national debt, which had reached $36 trillion, as a central concern. The agency highlighted that US federal debt and interest payment ratios had risen over more than a decade to levels significantly higher than those of similarly rated sovereign nations.
Persistent Large Fiscal Deficits: The downgrade reflected the ongoing failure of successive US administrations and Congress to reverse the trend of large annual fiscal deficits. Moody’s projected that federal deficits could expand to nearly 9% of the US economy by 2030, up from 6.4% in 2024.
Rising Interest Costs: Higher interest rates have increased the cost of servicing government debt. Moody’s noted that annual interest payments were expected to surpass $1 trillion within a few years, potentially exceeding spending on defense and Medicare if current trends continued.
Political Gridlock and Policy Uncertainty: The agency pointed to the inability of Congress and the administration to reach consensus on credible, long-term strategies to reduce deficits and stabilize the debt burden. Ongoing debates over tax cuts and spending plans, along with political polarization, were seen as obstacles to fiscal reform.
Tax Cuts and Revenue Concerns: Efforts to extend or expand tax cuts, such as those from 2017, were expected to add trillions to the deficit over the next decade. Attempts to raise revenue through tariffs also raised fears of a trade war and economic slowdown.
Outlook and Fiscal Trajectory: Moody’s indicated that the fiscal strategies under discussion were unlikely to yield a consistent, long-term reduction in deficits, projecting that the federal debt burden could climb to around 134% of GDP by 2035, up from 98% in 2024.
In summary, Moody’s downgraded US bonds due to the country’s rising debt, persistent large fiscal deficits, increasing interest costs, and a lack of credible political consensus to address these challenges.