Why the Moody's Downgrade of the US may be a big deal - or is it?

Let me first explain - I am NO expert on this topic, but I’m going to tackle it just based on how the markets reacted before. This is nothing more than a catalyst and understanding how market participants used this to their advantage last time might help. But make no mistake - I am no expert and this time may very well be different. The post is more about letting you make your own decision with the facts and not making an emotional decision. This isn’t your credit score going from 800 down to 600 so there’s no need to panic if you’ve got treasury bonds or money invested in the US.

Table of Contents for this post

Here’s what I’ll cover in this post and what you can expect:

1. Timeline and history of the credit downgrades and an overview of the 3 credit agencies.

2. What the market reaction was when the other 2 agencies downgraded the US.

3. What signals have happened this weekend that indicate how the markets will react.

4. How I’m planning my positions and planning out next week.

There are 3 credit agencies - when did the others downgrade the US?

The three main credit rating agencies are:

• Moody’s - the most recent one to downgrade the US on Friday (after market close)

• Standard & Poor’s (S&P) - downgraded the US in 2011 after the great financial crisis

• Fitch Ratings - downgraded the US in 2023 after all the Covid spending and higher interest rates began building the debt

When the credit rating agencies, lowers the credit rating of the United States, they are basically saying that lending money to the US government is now seen as a bit riskier than before. Credit ratings are like report cards for countries or companies that borrow money. The highest rating, Aaa (or AAA at other agencies), means “super safe-almost no risk of not getting paid back.” Moody’s just dropped the US from Aaa to Aa1, which is still very safe, but not the absolute best.

This is the first time in over a century that the US doesn’t have the highest rating from all three major agencies.

These agencies are like big, independent graders. Their job is to analyze how likely a country or company is to pay back its debts. They look at things like:

• How much debt the country has

• How strong the economy is

• How stable the government is

• Whether there are political fights that could mess up budgets

Each agency has its own rating scale, but the top ratings are Aaa (Moody’s) or AAA (S&P/Fitch), and the lowest are C or D (meaning default, or not paying back at all). If an agency thinks a borrower is getting riskier, it downgrades the rating. If things improve, it upgrades the rating.

Why Do These Ratings Matter?

• Interest Costs: Lower ratings can mean the US has to pay higher interest to borrow money, which can make the debt problem worse.

• Investor Confidence: Some big investors (like pension funds) are only allowed to buy the safest bonds. If the US is downgraded, it could limit who can buy US debt.

• Global Impact: Since the US dollar is used worldwide, changes in its credit rating can affect markets everywhere.

In Simple Terms

Think of the US government like a teenager with a credit card. The credit rating agencies are like the bank, deciding how trustworthy the teenager is. If the bank thinks the teen is spending too much and not managing money well, it might lower their credit limit or raise their interest rate. That’s what just happened to the US, and now borrowing money could get a little more expensive and complicated.

But even with the lower rating, the US is still considered a very safe borrower-just not the safest possible anymore

So what happened on Friday when the news from the Moody’s downgrade hit?