Moody’s warning about the substantial U.S. debt burden has become insignificant.

U.S. Debt Warning by Moody’s Lacks Market Impact

On Monday, financial markets seemed unfazed by a warning from Moody’s Investor’s Service that it was lowering its ratings outlook on U.S. Treasurys. The big-three ratings agency cited high levels of government debt and deficits coupled with political turmoil in Washington as reasons for the downgrade. In the past, similar warnings from Standard & Poor’s and Fitch have led to temporary shockwaves on Wall Street, but this time, it does not appear to have the same impact.

Vice President of investment strategy at Glenmede Investment Management, Michael Reynolds, expressed that the practical implications of a downgrade from triple-A to double-A are minimal, as demand for U.S. Treasurys will remain strong. Indeed, the $33.7 trillion U.S. debt and the $1.7 trillion deficit in fiscal 2023 are issues that the market deals with daily.

The Moody’s announcement, while causing some muted gains in major stock market indexes and a slight rise in long-dated Treasury yields, did not lead to significant market volatility. However, weak auctions of 10- and 30-year paper created concern among investors about the government’s long-term ability to pay its bills.

Despite these concerns, Glenmede is considering buying into longer-dated Treasurys, as they believe the U.S. may be headed for a recession in the coming years. However, this move is met with skepticism as the Federal Reserve remains committed to fighting inflation and has hinted at further interest rate hikes.

In response to the market uncertainty, investors have been placing bets on falling rates, leading to significant inflows into long-term Treasury bond funds.Overall, the Moody’s warning did resonate in the market, but the impact was not as extreme as many had expected.