US Treasury Bonds Plunge Due to Credit Rating Downgrade… 30-Year Yield Rises to 5.022%

Up by 12bp, 10-Year Treasury Yield Also Rises by 10bp to 4.546%

Asian and European Markets Decline, US Stock Index Futures Drop Over 1%

After Moody's downgraded the US government's credit rating from Aaa to Aa1 over the weekend, long-term US Treasury bonds plummeted. As Asian and European markets fell, US stock index futures such as the S&P 500 futures and the dollar also declined.

According to foreign media on the 19th, at 5:30 AM Eastern Time, the 30-year US Treasury yield recorded 5.022%, surging by 12 basis points (1bp=0.01%), a psychological resistance level. This is the highest since the 30-year Treasury yield reached 5.18% in 2023. The 10-year US Treasury yield rose by 10bp to 4.546%. Bond prices and yields move inversely.

S&P 500 futures fell by 1.2%, and Nasdaq 100 index futures dropped by 1.4%.

With the US credit rating downgrade and the release of data showing China's economic sluggishness, Asian stocks showed an overall decline, with Japan's Nikkei 225 index falling by 0.68% and South Korea's KOSPI dropping by 0.89%. In the European market, the Stoxx Europe 600 index fell by 0.7% at 10:40 AM London time.

According to Bloomberg, long-term Treasury yields could rise to 5.18%, the highest level since 2023, after surpassing 5%. This is the highest since 2007.

Interest rate hikes generally increase currency value, but concerns about debt are expected to amplify skepticism about the dollar, analysts predicted. The Bloomberg Dollar Index is near its lowest since April, and sentiment among options investors is the most negative in five years.

The credit rating downgrade was due to expectations of a slowdown in the US economy as Congress pushes for tax cuts and President Trump reverses existing trade agreements and enters new tariff negotiations. Concerns are rising that the weakness of US dollar-denominated assets will deepen with the credit rating downgrade.

Wells Fargo strategists Michael Schumacher and Angelo Manolatos predicted in a report that "Moody's credit rating downgrade will raise the 10-year and 30-year US Treasury yields by another 5-10 basis points."

Max Gokhman, Deputy Chief Investment Officer (VCO) at Franklin Templeton Investment Solutions, said, "The downgrade of the US Treasury credit rating is a natural result amid expectations of accelerated reckless fiscal spending." He added, "As institutional investors gradually shift US Treasuries to other safe assets, debt repayment costs will continue to increase, putting additional downward pressure on US Treasuries and the dollar." This is expected to reduce the attractiveness of US stocks.

Société Générale strategist Subadra Rajappa stated, "In the long term, rising interest rates will increase the government's net interest costs and deficits." She also said, "The weakening of the safe asset status of US Treasuries will affect foreign demand for the dollar, US Treasuries, and other US assets."

Typically, when Treasury yields rise, the US government's interest payment costs increase, and loan rates such as mortgages and credit cards rise, negatively impacting the economy.

However, Bloomberg macro strategist Mary Nicola predicted that "Moody's credit rating downgrade will not bring significant changes to US assets." Given the depth and breadth of the market, the negative impact on US Treasuries is limited.

Moody's, one of the three major credit rating agencies, downgraded the US government's credit rating from Aaa to Aa1 on the 16th. Moody's criticized the US government and Congress for the soaring budget deficit, stating that there are no signs of budget deficit reduction.

US Treasury Secretary Scott Besent dismissed concerns about debt and inflation due to tariffs in an interview with NBC's 'Meet the Press' on the 16th, saying, "Moody's is a lagging indicator. Everyone thinks that about credit rating agencies."

Moody's action was due to the expectation that the US government would add a federal budget deficit of $2 trillion (2,780 trillion won) amid US debt reaching $36 trillion (5 quadrillion won). Moody's predicted that "the federal budget deficit will expand from 6.4% in 2024 to about 9% of GDP by 2035, mainly due to increased interest payments on debt, increased social welfare spending, and relatively low tax revenue generation."

If the broad tax cuts being pushed by the Republicans are implemented, it is estimated that $3-5 trillion of new debt will be added over the next decade. The Congressional Budget Office (CBO) expects the US government's debt to reach 107% of GDP by 2029, breaking the highest record since World War II.

Nevertheless, Barclays analysts predicted in a report that "Moody's credit rating downgrade will not have a significant impact on financial markets." These analysts said, "Since S&P downgraded the US credit rating in 2011, the US government's credit rating downgrade has lost political significance, and the repercussions have been limited or nonexistent."

At the time of Moody's announcement, the US Treasury reported that China reduced its US Treasury holdings in March. This confirmed speculation that China was selling US Treasuries in March and April as a check against the US. Former Treasury official Brad Setser, however, assessed this as "a move to reduce bond duration rather than a decline in the dollar." Despite recent trade tensions and concerns about fiscal waste, Treasury statistics showed that foreign demand for US Treasuries remained strong in March.

Guest reporter Kim Jung-ah kja@hankyung.com