Shockwaves Hit Wall Street: Moody's Downgrades U.S. Credit, Stocks Mixed, Treasury Yields Soar!

Hold onto your seats, folks! U.S. stock indices are all over the place, and treasury yields are rocketing into the stratosphere after Moody's threw a major curveball by downgrading the U.S. credit rating.

The trading floor was buzzing with a mix of panic and confusion. On Monday, May 19, the Dow Jones edged up to 42,676 points, a mere 21.91 points or 0.05% increase from the market open. Meanwhile, the S&P 500 took a hit, dropping to 5,944, down 0.24%, and the tech-heavy Nasdaq wasn't far behind, sliding to 19,139, down 0.37%.

The rollercoaster started when Moody's, one of the big guns in credit rating, yanked the U.S. credit rating from Aaa to Aa1. This bombshell brings them in line with the moves by Standard & Poor's and Fitch, who downgraded in 2011 and 2023 respectively.

And boy, did the markets feel it! U.S. Treasury yields shot up like a rocket. The 30-year yield hit a staggering 5.03%, the highest since November 2023. The 10-year and 2-year yields weren't far behind, jumping to 4.5% and 3.993% respectively.

The U.S. has an ongoing debt problem: Moody's

Here's the deal: the U.S. credit rating isn't just some boring number—it directly jacks up the cost of government borrowing. When those treasury yields spike, Uncle Sam's got to cough up more in interest on new Treasuries. It's like a financial feedback loop from hell, where higher interest costs strangle the government's ability to pay, making investors jump ship and pushing borrowing costs even higher.

Moody's pointed the finger at the U.S. government's ballooning deficits as the culprit behind the downgrade, and they've been simmering for a while now. They're also worried about the potential extension of those 2017 tax cuts, which could slap an extra $4 trillion onto the deficit.

"Successive U.S. administrations and Congress have been playing hot potato with the budget, failing to agree on any real measures to stop the bleeding from these massive annual fiscal deficits and skyrocketing interest costs. We're not holding our breath for any significant multi-year reductions in mandatory spending and deficits from what's on the table now," Moody's analysts declared.