US Credit Rating Kills Trump's Plans!

Alternatively, journalists have not a clue about bond markets

This is written up as being rather more pantswetting than it actually is:

The United States has been stripped of a prized top credit rating for the first time, as fears rise that the Trump administration will not tackle its soaring debts.

Moody’s has downgraded America’s credit rating to Aa1, down one notch from Aaa, amid warnings over soaring deficit and debt interest costs.

This will lead to:

It comes as Mr Trump tries to get major tax cuts signed off by lawmakers, which will add further strain to America’s budget.

The downgrade means that US government debt is higher risk. In turn, this could mean that bond investors may demand even higher yields on US treasuries, further adding to borrowing costs.

And no.

Now, bond and credit ratings can be important, yes. We all recall that fuss back at the Great Financial Crisis, about the ratings agencies giving those dodgy mortgages too high a rating, right?

Except, actually, the ratings agencies had very little to do with it all. Those tranches of the bonds that they said were AAA did, in fact, tend to turn out to be AAA. Those bond pools have been paying out all these years too. I’m not even sure that any of the AAAs went bust and certainly there wasn’t same vast wave of such.

Further, the “equity” tranches, the stuff rated C and so on, that all did go bust. Which means that the agencies were right, not that they were wrong. The problem was that those C tranches remained upon the books of the banks - and hugely leveraged as well - so taking the banks with them when they did go bust.

The problem was the business model of the banks, not the ratings offered by the ratings agencies.

More normally what the agency says the new bond should be rated at defines the interest coupon the bond must offer. OK.

For sovereign bonds this all isn’t true. The government doesn’t pay the agency for a rating - unlike all other issuers. The ratings agencies actually do it for free - it’s from the PR budget in fact. Interest rates are set by the market, not the rating.

One more step, on sovereigns the agencies follow the market, not lead it. It’s an explanation for why coupons have been rising, not a cause of them doing so.

So, not very pantswetting at all. And then there’s this:

The US has now lost its triple-A rating from all three major credit rating agencies, after Fitch made a similar downgrade in 2023. S&P Global downgraded the US in 2011.

Even for bond funds that do follow ratings on sovereigns it’s also true that the insistence is upon taking best of three of those three agencies. So, whatever is going to happen about the US not being AAA any more happened back in 2023. That’s just how the system works, two outta three.

Melissa Lawford US economics correspondent

Ho hum.