- Markets on Monday ignored a warning issued on Friday by Moody’s Investors Service that it would lower its Treasury bond rating outlook.
- “There’s no insight from Moody’s that they have private information that no one about the US government knows,” said Michael Reynolds, a strategist at Glenmede. “So it’s really a non-issue.”
- Moody’s is the only agency among the big three that still has a AAA rating on US debt.
Traders work on the floor of the New York Stock Exchange during morning trading on November 10, 2023 in New York City.
Michael M. Santiago | Getty Images
There was a time when bad news about US debt would send markets into chaos, but not this month.
Markets on Monday ignored a warning issued on Friday by Moody’s Investors Service that it would lower its Treasury bond rating outlook. High levels of government debt and deficits, coupled with political brinksmanship in Washington, could jeopardize the global standing of government-issued fixed income, the Big Three credit rating agency said.
When Standard & Poor’s and Fitch issued similar warnings, they sent at least temporary shock waves throughout Wall Street.
But with domestic financial and political chaos seeming like old news, the shake-up of the ratings service doesn’t seem to have the same effect.
“If we go from AAA to Double A, what does that mean in practice? It doesn’t actually mean anything. There will still be mass demand for US Treasuries,” said Michael Reynolds, vice president of investment strategy at the bank. Glenmede Investment Management. “There’s no insight from Moody’s that they have private information that no one about the U.S. government knows. So, it’s really a non-issue.”
In fact, no one has to tell investors about the US’s $33.7 trillion debt and $1.7 trillion deficit in fiscal year 2023. Both are well-known issues that Wall Street grapples with daily.
The news provided by Moody’s only echoes those problems. Despite its warning, the service is the only one of the Big Three that still has a AAA rating for US debt; Fitch lowered its rating in August, and Standard & Poor’s took this step 12 years ago.
Things were relatively calm in the markets on Monday, the first trading day after Moody’s announced that it would shift its outlook to negative from stable. Major stock market indexes posted slight gains, while long-term Treasury yields rose slightly.
Earlier last week, markets were hit by weak auctions for 10- and 30-year securities, a reminder that investors are concerned about the government’s long-term ability to pay its bills. Net interest on debt for fiscal year 2022 cost taxpayers $659 billion. In October 2023, the first month of fiscal year 2024, the total deficit reached more than $66.5 billion, Treasury reported Monday.
“People are increasingly starting to think about that,” Reynolds said of the issues in fixed income markets. “Is there a moment in the next couple of years when this comes to a head and things get out of control? Probably not. But it’s one of those things that will continue to bother us until politicians get serious about fixing some of these issues.”
Reynolds noted that Glenmede is currently overweight in cash and is looking for opportunities to begin buying into longer-term Treasuries. The latest move is based on the company’s belief that the United States is likely heading into a recession, which would drag down yields and make longer-dated securities more attractive.
However, doubts remain about bonds, especially if inflation remains high and the Fed keeps benchmark interest rates high. Federal Reserve Chair Jerome Powell also rattled markets last week when he issued a reminder that the central bank remains committed to fighting inflation and could raise interest rates further.
“While we see room for improvement in the demand backdrop, it is dependent on greater conviction at the end of the Fed’s rate hike cycle,” Megan Sweeper, an interest rate analyst at Bank of America, said in a note to clients on Monday. “This could be confirmed or denied by this week’s data,” which will include inflation reports on consumer and producer prices.
Investors appear to be making some retail bets that interest rates may start to fall: The $42.2 billion iShares 20+ Year Treasure Bond ETF took in $831.6 billion in new cash in November, according to FactSet.