by Bryan Perry
May 20, 2025
After the closing bell last Friday, it was reported that U.S. sovereign debt was downgraded by Moody’s Ratings due to soaring government debt that’s approaching a staggering $37-trillion. In dramatic fashion, Moody’s lowered the U.S. credit score to AA1 from AAA, joining Fitch Ratings and S&P Global Ratings in downgrading the world’s biggest economy below their top (AAA and equivalent) position.
This one-notch cut comes more than a year after Moody’s changed its outlook on their U.S. credit rating to negative. The federal budget deficit is running at nearly $2-trillion a year, each year, or more than 6% of GDP, and Congressional Republicans are pushing through budget legislation that could add debt even faster. “While we recognize the U.S.’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s wrote in a statement.
The U.S. is running a massive budget deficit even as interest costs for Treasury debt continued to rise due to a combination of higher rates and more principal debt scheduled to be financed. The fiscal deficit in the year that began October 1, 2024, is already running at $1.05-trillion, 13% above a year ago.
Moody’s had been a holdout in keeping U.S. sovereign debt at its highest credit rating level possible, but Friday’s move brings the agency into line with its rivals. Standard & Poor’s downgraded the U.S. to AA+ from AAA in August 2011, and Fitch Ratings cut the U.S. rating to AA+ from AAA, in August 2023.
The rating cut comes at the same time the committee in the House of Representatives failed to advance the House Republicans’ massive tax-and-spending bill Friday, but it passed by one vote late Sunday.
Despite returning home from the Middle East with nearly a trillion dollars of commitments by various Arab nations, the $37-trillion elephant in the room is still there, larger and more ominous than ever, and all administrations since 2000-01, the last time there was a budget surplus, are responsible. The timeline below shows the trend for the past 25-years. At the end of 2023, the federal debt-to-GDP ratio was 122%.
Note: The columns represent: (1) the year, (2) accumulated federal debt at year’s end, in billion; (3) debt as a percent of that year’s gross domestic product (GDP), and (4) the leading financial or external news event that year.
Source: The Balance Money
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This Debt Downgrade May Delay (or De-Fang) the “One Big Beautiful Bill”
With earnings season nearly complete, low inflation numbers just released and Trump’s Middle East fundraiser wrapped up, the market was looking forward to the “One Big, Beautiful Bill” to make it through the House last Friday, before moving on to the Senate and being signed into law this week, before Memorial Day, but Friday’s fresh downgrade by Moody’s could stall any near-term passage of the bill until there is bold clarity on the revenue side of this higher spending/lower taxation piece of legislation.
Moody’s downgrade blues could put new downward pressure on the dollar, upward pressure on long-term bond yields and gold prices, and hopefully put immense political pressure on our elected officials that this ticking debt bomb cannot be kicked down the road any further. America voted for fiscal responsibility when they voted for Trump and the whole DOGE initiative. Dealing with the national debt was a major campaign pledge, and Moody’s just provided a major incentive to get serious about fulfilling that pledge.
Long-term Treasury yields have already been moving higher, with 30-year rates creeping toward 5% as the tax-cut plan adds to concerns about the surging debt load. The U.S. deficit has been in excess of 6% of GDP for the past two years – an unusually high burden outside of economic recessions or world wars.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
“Being asked why Moody’s would downgrade the U.S. now,” Andrew Brenner at NatAlliance Securities said, “Moody’s is trying to send a message to Congress to get their act together.” Jamie Dimon, chief executive officer of JPMorgan Chase & Co., in a Bloomberg Television interview, said our debts and deficits create risks of inflation and higher long-term rates. At JPMorgan’s annual Global Markets Conference in Paris, he added that high deficits might slow growth and create a stagflation scenario.
About one-third ($9.3-trillion) of all existing debt held by the public is scheduled to mature between April 1, 2025, and March 31, 2026, according to Peter G. Peterson Foundation. More than $3.1-trillion of the debt set to roll over during that period was last issued two or more years ago, so it will likely need to be reissued at higher rates. “For those looking for a signpost to tell us when to stop adding to our national debt, they should look no further than Moody’s downgrade,” said Michael Peterson, CEO of the Peterson Foundation. “We have plenty of options to fix this, and it can be done quickly, with leadership.”
Before the Moody’s downgrade crossed the wires last Friday, after hours, equities finished out the week on a strong note as the U.S. and the European Union broke an impasse to enable tariff talks, fueling the risk-on tone that had been sparked by the recent cooling in trade tensions with China. Whether these big steps in progress on trade, reaching a nuclear deal with Iran, striking a truce between Ukraine and Russia can offset this Moody’s news and keep the stock market rally intact this week is uncertain, but whichever way the market goes this week doesn’t remove the fact that there is no place for this debt elephant to hide.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
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Inflation is Low and Falling – Despite What the Fed Says or Does
Income Mail by Bryan Perry
Friday’s Downgrade of U.S. Credit Puts the Focus Back on Debt
Growth Mail by Gary Alexander
How Can Poor Nations Grow Rich…Fast?
Global Mail by Ivan Martchev
“Overbought” Can Be a Nebulous Concept
Sector Spotlight by Jason Bodner
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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