Moody’s lowers U.S. credit-rating outlook to negative, warns 'fiscal deficits will remain very large'

Moody’s Investors Service turned negative on the US’s credit rating outlook Friday, citing risks to the nation’s fiscal strength and political polarization.

The rating assessor lowered the outlook from stable, even as it affirmed the nation’s rating at Aaa, the highest investment-grade notch.

“Downside risks to the US’ fiscal strength have increased and may no longer be fully offset by the sovereign’s unique credit strengths,” William Foster, a senior credit officer at Moody’s, wrote in a statement. “In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability.”

Moody’s, which is the only remaining major credit grader to assign the US a top rating, said the Aaa affirmation reflects that the US’s formidable credit strengths still preserve its credit profile.

In a statement, White House Press Secretary Karine Jean-Pierre said the outlook change was a “consequence of congressional Republican extremism and dysfunction.” Deputy Secretary of the Treasury Wally Adeyemo, meanwhile, pushed back against the outlook change, saying the “American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”

Moody’s had earlier hinted at a potential downgrade, saying in a Sept. 25 report that while “debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of US institutional and governance strength relative to other Aaa-rated sovereigns.”

Fitch Ratings has the United States’ sovereign rating at a score of AA+, one notch below its highest mark, after the credit assessor downgraded the US government in August following the latest debt-ceiling battle. S&P Global Ratings has it at a score of AA+, also just below its top grade, having stripped the US of its top score in 2011 on the heels of an earlier debt-ceiling crisis.

Ten-year Treasury note futures dropped after the announcement, reaching fresh session lows. The yield on US 10-year Treasuries, meanwhile, extended back through 4.65% and ended the session matching the highs reached in the Asia session.

The government’s credit plans have been in particular focus after the Treasury last week announced that it would borrow $112 billion in quarterly refunding and said it expects one more step up in quarterly issuance of longer-term debt.

The US also faces a government shutdown on Nov. 18 if Congress doesn’t come to an agreement to pass short-term spending bills. These economic disruptions would come at a challenging time for investors, who already have to contend with a toxic mix of large US fiscal deficits and persistent inflation.

“Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability,” according to Moody’s.

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