Moody’s Market Jolt Will Leave Its Mark

Moody’s Ratings has followed S&P Global Ratings and Fitch Ratings in stripping the US of its top-notch credit score, lowering it one level to Aa1. While it shouldn’t really come as a surprise, history suggests that it augurs bond market volatility in the weeks and months to come, forcing us to wake up to facts we’ve been conveniently ignoring.

We can quibble about the direct causality, but bad things seem to happen when America’s credit rating is being questioned. When S&P cut the US in August 2011, yields on 10-year Treasury notes initially jumped, but they ended up falling in the final assessment as the S&P 500 Index slumped and markets treated the episode as a “flight to safety” trade. In August 2023, the market impact was a bit less immediately obvious, though nonetheless insidious. As the Wall Street commentary highlighted at the time, we’d seen this before, and it was Fitch for crying out loud, a firm without the same pedigree as the others.