US debt costs exceed 5% after Moody's negative rating

Moody's downgrade and a tax bill that analysts say would worsen the country's image caused Wall Street to open lower, with investors selling stocks, bonds, and dollars, as concerns about debt grew. The combination indicates that sentiment is deteriorating regarding the outlook for the world's largest economy.

Although the Dow Jones Industrial Average, which opened with a loss of more than 300 points after several days of positive results, the S&P and Nasdaq moved out of the red throughout the day, that didn't change the feeling of uncertainty.

The United States has managed to manage a high deficit for years thanks to its economic strength and the structural role that the dollar and the country's public debt play in the global financial system. Analysts, however, are now questioning this safe haven status in the face of President Trump's erratic policies.

The shadow of the trade war, despite the truce established with China after suspending tariffs with other countries, remains looming, hence the Federal Reserve's (Fed) wait patiently before taking action on interest rate cuts, as President Trump has called for.

Moody's was the last international rating agency to downgrade the US's credit rating from triple-A. The agency based its decision on more than a decade of inaction by successive administrations and Congress to curb the trend toward large fiscal deficits. The current deficit stands at $36 trillion. Bessent downplayed this concern and said the government is willing to reduce spending and boost economic growth.

But Moody's decision means that US debt is not officially considered "pristine" by any of the major rating agencies.

For this latest agency to comment, the deficit could rise to 9% of gross domestic product in the next decade, up from 6.4% last year.

These levels had only been reached during global conflicts, such as World War II, the 2008 financial crisis, or the lockdown imposed by the COVID pandemic.

The downgrade issued by Moody's had every potential to disrupt the relative calm achieved by markets following the tariff negotiations between China and the U.S. that led to the three-month pause.

"The combination of a weakening appetite for buying US assets and the rigidity of the US fiscal process is making the market nervous," economist George Saravelos said in a note.