Moody’s warns US credit rating at risk due to large fiscal deficits causing ‘negative’ outlook

Moody’s on Friday changed its outlook on the US credit rating to “negative” from “stable” citing large fiscal deficits and a decline in debt affordability.

The move follows a rating downgrade of the sovereign by another rating agency, Fitch, earlier this year, which came after months of political brinkmanship around the US debt ceiling.

“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,” Moody’s said in a statement.

Republicans who control the House of Representatives expect to release a stopgap spending measure on Saturday, aimed at averting a partial government shutdown by keeping federal agencies open when current funding expires next Friday.

Moody’s is the last of the three major rating agencies to maintain a top rating for the US government. Fitch changed its rating from triple-A to AA+ in August joining S&P, which has an AA+ rating since 2011.

While it changed its outlook – indicating that a downgrade is possible over the medium term – Moody’s affirmed its long-term issuer and senior unsecured ratings at ‘Aaa’ citing the US credit and economic strengths.

“The US’ institutional and governance strength is also very high, supported in particular by monetary and macroeconomic policy effectiveness,” it said.

Top officials in President Biden’s administration rejected the move.

White House spokesperson Karine Jean-Pierre said the change was “yet another consequence of congressional Republican extremism and dysfunction.”

“While the statement by Moody’s maintains the United States’ AAA rating, we disagree with the shift to a negative outlook. The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset,” Deputy Treasury Secretary Wally Adeyemo said in a statement.

Adeyemo said the Biden administration had demonstrated its commitment to fiscal sustainability, including through over $1 trillion in deficit reduction measures included in a June agreement struck with Congress on raising the US debt limit, and Biden’s proposal to reduce the deficit by nearly $2.5 trillion over the next decade.

The outlook change comes at a volatile stretch for the bond market. Treasury yields have soared over the last few months to 16-year highs on expectations the Federal Reserve will keep monetary policy tight, as well as on US-focused fiscal concerns.

“The sharp rise in US Treasury bond yields this year has increased pre-existing pressure on US debt affordability,” Moody’s said.

Yields, which move inversely to bond prices, have reversed some of the gains in recent weeks.

“It is a reminder that the clock is ticking and the markets are moving closer and closer to understanding that we could go into another period of drama that could lead ultimately to the government shutting down,” said Quincy Krosby, chief global strategist at LPL Financial.