The last credit rating agency to hold out has finally pulled the plug. Moody’s downgraded the US’ sovereign credit rating by one notch to AA1 on Friday, citing mounting fiscal pressures and rising borrowing costs in an accompanying statement. The move means none of the Big Three agencies now rate the world’s largest economy at the top-tier AAA level, after S&P slashed the US’ credit rating back in 2011 and Fitch’s in 2023 downgrade.

The move was a long time coming, after Moody’s had flagged risks to the US fiscal position back in 2023 when it shifted the outlook to negative. The agency now says that rising debt, a widening budget deficit, and interest costs “significantly higher than similarly rated sovereigns” pushed it to take action. It projects the federal deficit will reach nearly 9% of GDP by 2035, up from 6.4% in 2024, driven by rising entitlement spending, weak revenue generation, and interest payments on a debt pile that now exceeds USD 36 tn. “While we recognise the US’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” the agency said.

The final straw? A massive Republican tax-and-spending package currently making its way through Congress is widely expected to balloon the deficit even further, with estimates putting its potential cost at USD 4-5 tn over the next decade. That’s on top of an already unsustainable fiscal path, Moody’s warned. “Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” the agency said in its statement.

MARKET REAX- The ten-year US Treasury yield rose 5 bps to 4.49% on Friday. Analysts expect yields to keep rising as investors reassess the risk profile of US government bonds. “The downgrade may indicate that investors will demand higher yields on Treasuries,” Brandywine Global Investment Management’s Tracy Chen told Bloomberg.

The White House brushed off the downgrade, with White House Communications Director Steven Cheung targeting Moody’s Analytics chief economist Mark Zandi — who had no involvement in the report — saying, “Nobody takes his ‘analysis’ seriously. He has been proven wrong time and time again.” The administration insists its tax reform plans will raise growth and revenue and bring down the deficit in the long run. “Moody’s downgrade…should be a wake-up call to Trump and congressional Republicans to end their reckless pursuit of their deficit-busting tax giveaway,” Senate Democratic Leader Chuck Schumer said.

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THE CLOSING BELL: TADAWUL-

The TASI fell 0.4% on Thursday on turnover of SAR 5.3 bn. The index is down 4.6% YTD.

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