S&P maintains the U.S. AA+ rating amid deficits and yield fluctuations: Tariff revenue offsets the impact of the "Big and Beautiful" bill

According to the Zhitong Finance APP, S&P Global Ratings, one of the three major international credit rating agencies, stated that despite the significant impact of a recent massive spending bill on taxes called "Big and Beautiful" on the U.S. fiscal system, which has led to long-term (10 years and above) U.S. Treasury yields fluctuating at historically high levels, the U.S. can still maintain the strong resilience of its credit system. This is partly because the fiscal revenue generated from tariffs will alleviate the fiscal shocks and pains faced by the U.S.

The agency has confirmed the credit rating of the world's largest economy, which shows considerable resilience. In its latest announcement, S&P maintained the long-term credit rating of the U.S. at AA+ and the short-term credit rating at A-1+. The long-term rating outlook remains stable.

Tariffs can offset concerns about the fiscal deficit

"As effective tariff rates rise, we expect substantial tariff revenues to generally offset potentially weaker U.S. fiscal outcomes related to recent U.S. fiscal legislation, which includes both tax cuts and increased tariff revenues and expenditures," wrote S&P analysts, including Lisa Schineller, in a report.

S&P's latest rating decision brings a positive factor for U.S. President Donald Trump, who previously dismissed S&P's view that "boldly imposed tariffs will harm the U.S. economy." Although S&P analysts did not refute Trump's viewpoint in the latest report, they at least pointed out one benefit of tariffs: while significantly increasing fiscal expenditures in other areas, tariffs provide a boost to government revenues.

In July, U.S. tariff revenues reached a record high for a single month, climbing to approximately $28 billion. U.S. Treasury Secretary Scott Bessent even stated that tariff revenues for the entire year of 2025 could "far exceed 1% of U.S. GDP," slightly raising his previous forecast of $300 billion. However, the U.S. Congressional Budget Office, led by bipartisan members, estimates that the recently passed budget bill will increase the U.S. fiscal budget deficit by about $3.4 trillion over the next 10 years.

S&P's latest perspective is crucial for investors in the world's largest bond market. Investors have been concerned about the fiscal deficit and broader debt sustainability issues since Trump returned to the White House in January. The negative sentiment and adverse effects brought about by tariff concerns and the Trump administration's multi-trillion-dollar tax bill have caused the 30-year U.S. Treasury yield to surge above 5% in May.

The "term premium" phenomenon highlights ongoing market concerns about the increasingly large interest on U.S. Treasuries

On Tuesday morning in Asia, the 30-year U.S. Treasury yield remained at 4.93%, while the 10-year U.S. Treasury yield, known as the "global pricing anchor," was reported at 4.33%, still maintaining a relatively high level for the year.

After the passage of the "Big and Beautiful" bill led by Trump, the government budget deficit may expand significantly. Coupled with expectations of interest rate hikes by the Bank of Japan, which have caused a substantial rise in Japanese long-term government bond yields, these factors have collectively intensified the recent upward pressure on U.S. Treasury yields, especially for the 10-year U.S. Treasury yield, which is known as the "global asset pricing anchor," and other longer-term U.S. Treasury yields may be on a significant upward trajectory During the Biden administration, the massive issuance of national debt has significantly increased the scale of U.S. Treasury bonds to $36 trillion in just a few years. This has also led to a soaring budget deficit for the Treasury and record-high interest payments on U.S. debt. With the passage of the "Big and Beautiful" bill, which will bring even larger budget deficits, the market is increasingly concerned that U.S. Treasury yields across all maturities may continue to soar in 2025, especially the longer-term Treasury yields (10 years and above), which may remain near historical highs driven by the rising "term premium" seen this year.

The so-called term premium refers to the extra yield that investors require for holding long-term bonds due to the associated risks. Some economists believe that during the Trump 2.0 era, national debt and budget deficits will be much higher than official forecasts, primarily because the new government led by Trump will adopt a framework of "domestic tax cuts + external tariffs" to promote economic growth and protectionism. Coupled with an increasingly large budget deficit, interest on U.S. debt, and military defense spending, the Treasury's bond issuance may be forced to expand even more than the Biden administration's excessive spending during the "Trump 2.0 era." Additionally, under "de-globalization," China and Japan may significantly reduce their holdings of U.S. debt, and the spillover effects of rising long-term Japanese bond yields will likely push the "term premium" even higher than historical data.

"These numbers are still slight differences close to the top of the rating pyramid and do not indicate any substantial change in the health of U.S. finances—this is a complex issue," said Homin Lee, a senior macro strategist at Lombard Odier Ltd. in Singapore.

In May, the U.S. lost its last "highest rating" from the three major rating agencies when Moody's Ratings downgraded the U.S. sovereign rating from Aaa to Aa1. Moody's attributed this to the increasingly swollen budget deficits caused by successive U.S. governments and Congress, with almost no signs of relief. Shortly before this, Fitch Ratings and S&P had already downgraded the U.S. credit rating from the highest AAA rating.

S&P stated that the latest stable outlook means it expects that while the U.S. fiscal deficit will not significantly improve in the coming years, it will not continue to deteriorate either. The agency predicts that over the next three years, the net debt of the U.S. government will exceed 100% of GDP, but it believes that the average general government deficit from 2025 to 2028 will be 6%, which is expected to be lower than last year's 7.5%.

Fiona Lim, a senior foreign exchange strategist at Malayan Banking Bhd, stated that after the tax cuts and spending bills of the Trump administration raised ongoing market concerns about the sustainability of U.S. debt, S&P's confirmation of its relatively positive rating may be beneficial for the U.S. dollar and Treasury bonds. However, this strategist also noted that more enduring driving factors will come from the Federal Reserve's meeting minutes and the significant speech by Federal Reserve Chairman Jerome Powell at the Jackson Hole Global Central Bank Annual Meeting on Friday During the Asian trading session on Tuesday morning, a measure of the US dollar rose by about 0.1%