Critical moment, Moody's downgrade! On Monday's opening, the U.S. witnessed a small-scale "stock-bond-currency" triple kill

After Moody's downgraded the U.S. rating, the U.S. market faced a "triple kill" of stocks, bonds, and currencies.

After the U.S. stock market closed last Friday, Moody's Ratings announced that it had downgraded the U.S. credit rating from the highest level of Aaa to Aa1. Following this downgrade, the world's largest economy, the United States, has now been rated below the highest AAA level by all three major rating agencies.

On Monday during the early Asian trading session, this news triggered a new round of selling of U.S. assets. U.S. stock futures, U.S. Treasury futures, and the U.S. dollar index all weakened simultaneously, especially the 30-year U.S. Treasury yield, which approached the 5% mark, reaching a new high since mid-2007.

Moody's cited the growing budget deficit in the U.S. as the reason for the downgrade, predicting that the federal deficit will expand from 6.4% of GDP in 2024 to nearly 9% by 2035, primarily driven by increased debt interest payments, rising welfare expenditures, and relatively low tax revenues.

The timing of Moody's downgrade is particularly sensitive, as earlier that day, the U.S. House Budget Committee failed to pass Trump's massive tax reform plan due to obstruction from hardline Republicans.

According to estimates from the Joint Committee on Taxation, the total cost of this tax reform plan over the next decade is $3.8 trillion, while other independent analysts believe that if the temporary provisions in the bill are extended, the cost could be even higher.

U.S. Treasury yields soar, confidence in the dollar is waning

On Monday, the three major U.S. stock index futures collectively fell, with Dow futures down 0.66%, S&P 500 futures down 0.69%, and Nasdaq 100 futures down 0.75%.

U.S. Treasury yields almost universally rose. Among them, the 30-year U.S. Treasury yield surged by 10 basis points at one point, enough to push it above 5%, marking the highest level since mid-2007, matching the peak level of November 2023.

Last Friday, the yield on the 10-year U.S. Treasury rose to 4.49% amid low trading volume. These rising yields will not only increase the U.S. government's debt repayment burden but also threaten to weaken the real economy by pushing up loan rates for mortgages and credit cards.

As of the time of writing, the 30-year U.S. Treasury yield had increased by 6.7 basis points during the day, reported at 4.965%.

Wells Fargo's strategists Michael Schumacher and Angelo Manolatos predict:

“The yields on 10-year and 30-year U.S. Treasury bonds are expected to rise by another 5-10 basis points due to the Moody's downgrade.”

Generally speaking, rising bond yields typically boost the country's currency assets, but confidence in dollar assets is eroding due to the U.S.'s massive debt problem. Data shows that the Bloomberg Dollar Index is nearing its April low, and the sentiment among options traders is the most negative in five years.

European Central Bank President Christine Lagarde stated in a media interview on Saturday that the recent depreciation of the dollar against the euro, although counterintuitive, reflects "uncertainty and loss of confidence in U.S. policy in certain areas of the financial markets."

"Sell America" sentiment may resurface

In April of this year, the U.S. market faced widespread pressure due to Trump's tariff policies, forcing investors to reassess the core position of U.S. assets in their portfolios.

As the trade situation has eased recently, some of the selling sentiment has alleviated, and investors' focus in the bond market has quickly shifted to the U.S. fiscal trajectory. Moody's downgrade of the U.S. rating undoubtedly puts further pressure on dollar assets.

Max Gokhman, Deputy Chief Investment Officer at Franklin Templeton Investment Solutions, stated:

“The downgrade of U.S. Treasury ratings is not surprising in the face of ongoing generous, unfunded fiscal spending, and this trend will only accelerate.”

“As large investors (including sovereign and institutional investors) gradually exchange U.S. Treasuries for other safe-haven assets, the cost of debt repayment will continue to rise. Unfortunately, this could create a dangerous bear market steepening spiral for U.S. yields, further applying downward pressure on the dollar and reducing the attractiveness of U.S. stocks.”