LIVE MARKETS-Moody's downgrade ramifications: dampened appetite for treasuries, intensified fiscal policy pressure

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MOODY'S DOWNGRADE RAMIFICATIONS: DAMPENED APPETITE FOR TREASURIES, INTENSIFIED FISCAL POLICY PRESSURE

Moody's late Friday downgrade of the United States' credit rating - to Aa1 from Aaa - has renewed fears over the size of the U.S. budget deficit even as a bill to inflate it even further winds its way through the chambers on Capitol Hill.

As investors await the bill's final form, Wells Fargo Investment Institute (WFII) has published a note covering what it believes to be the key investor takeaways from the downgrade.

First, the WFII research team led by bond analyst Jon North is quick to point out that Moody's action, which it justified by citing "the failure to increase revenue or structurally cut spending," along with the "sustained increase in government debt and interest payment ratios" according to the note, brings its rating in line with the other two major rating agencies - S&P and Fitch, who downgraded U.S. sovereign credit in 2011 and 2023, respectively.

WFII expects minimal market impact from the downgrade and says "the risk of a fiscal crisis appears to be low," it adds that the resulting upward pressure on Treasury yields, as the reference for most U.S. borrowing, "could also elevate interest rates on consumer loans, including mortgages and credit cards, impacting households and businesses."

Other deleterious effects of the downgrade include a dampening global appetite for U.S. Treasuries. WFII says "while demand for Treasuries is likely to remain strong, in our view, reduced foreign appetite - already evident following President Donald Trump's tariff announcements - could exacerbate fiscal pressures."

"Politically, the downgrade could be perceived as a setback for the Trump administration, intensifying debates over fiscal policy," North and his team writes.

As guidance for fixed income investors, WFII prefers intermediate-term maturities (3- to 7-year notes), which it believes will "provide attractive yields and reduce duration exposure."

(Stephen Culp)

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MONDAY'S EARLIER LIVE MARKETS POSTS:

LEADING ECONOMIC INDEX POSTS BIGGEST MONTHLY DROP IN OVER TWO YEARS - CLICK HERE

WALL ST SLUMPS ON MOODY'S DOWNGRADE AS LAWMAKERS WRANGLE TRUMP TAX BILL - CLICK HERE

U.S. FUTURES POINT TO DROP AT THE OPEN AFTER MOODY'S DOWNGRADE - CLICK HERE

ARE EUROPEAN EQUITY VALUATIONS HIGH? - CLICK HERE

THE DOLLAR'S FISCAL FROWN - CLICK HERE

FEES POWER BANK BEATS - CLICK HERE

LOWER BUT CALMLY - CLICK HERE

LOTS GOING ON, EUROPEAN FUTURES OUTPERFORM - CLICK HERE

MORNING BID: SO, CHINA SHOULD CONSUME MORE AND THE US LESS? - CLICK HERE

(Reporting by Chuck Mikolajczak)

((charles.mikolajczak@tr.com; @chuckmik.bsky.social;))