Bond yields rise, futures fall as investors weigh fiscal risks and global confidence
Stock futures fell sharply on Sunday evening after Moody’s Ratings downgraded the United States’ long-held triple-A credit rating, reigniting concerns about the country’s fiscal outlook and its rising debt burden.
Futures tied to the Dow Jones Industrial Average were down 291 points (0.7%), while S&P 500 futures dropped 0.8% and Nasdaq 100 futures shed 0.9%. The early reaction reflected investor unease about the potential ripple effects on bond markets and broader asset pricing.
Moody’s, the last of the “big three” agencies to hold the US at Aaa, cut the rating to Aa1 late Friday, citing a deteriorating fiscal trajectory and “a lack of effective policy action” to rein in deficits. The agency said rising entitlement spending, higher interest costs, and continued political gridlock were all contributing to growing debt sustainability risks.
“Here’s a major rating agency calling out that the US has strained debts and deficits,” said Peter Boockvar, CIO at Bleakley Financial Group.
The downgrade follows a strong week for equity markets, powered by optimism around trade. The Nasdaq rose more than 7%, the S&P 500 gained over 5% for its fifth straight advance, and the Dow climbed 3%, returning to positive territory for 2025. However, Moody’s announcement has now shifted investor focus back to structural weaknesses in US fiscal policy.
Fiscal strain meets geopolitical risk
The Moody’s downgrade comes amid rising borrowing costs. On Friday, 10-year Treasury yields touched 4.49% in thin after-hours trading, while the 30-year yield is poised to rise above 5%, a level not seen since 2007.
Max Gokhman, deputy CIO at Franklin Templeton Investment Solutions, warned of a “dangerous bear steepener spiral,” where investors begin selling longer-dated US debt, forcing yields higher and potentially putting downward pressure on the dollar and equities.
“Debt servicing costs will continue creeping higher as large investors, both sovereign and institutional, start gradually swapping Treasuries for other safe haven assets,” Gokhman said.
Although a weaker dollar can sometimes support exports, sentiment has shifted markedly. A Bloomberg dollar index is nearing April lows, and options traders are now the most bearish on the greenback in five years.
European Central Bank President Christine Lagarde described the dollar’s recent decline as “counterintuitive” but reflective of “uncertainty and loss of confidence in US policies.”
Washington downplays risk
US Treasury Secretary Scott Bessent downplayed the significance of the downgrade, calling Moody’s a “lagging indicator” in a Sunday interview on NBC’s Meet the Press. Bessent reaffirmed the Trump administration’s commitment to spending restraint and economic growth.
At the same time, Trump told reporters he would speak with Russian President Vladimir Putin on Monday morning, citing hopes to reduce geopolitical tensions over the war in Ukraine.
Moody’s warned that the US budget deficit, now nearing US$2tn annually—or over 6% of GDP—could widen further to nearly 9% by 2035. The Congressional Budget Office had previously estimated US debt would exceed 107% of GDP by 2029, surpassing post-World War II levels.
Despite those projections, Moody’s said it sees “no material multiyear reductions in mandatory spending or deficits” under current proposals. Ongoing work on a new tax-and-spending bill could add another US$3.8tn to the federal debt over the next decade, with independent analysts warning the true cost could be much higher if temporary provisions are extended.
Investor impact expected to be modest—for now
While the downgrade is symbolically significant, many analysts downplayed the likelihood of lasting market disruption. Barclays strategists said the downgrade was unlikely to trigger forced selling of Treasuries or affect money market operations, noting similar downgrades in 2011 and 2023 had only limited consequences.
Toby Nangle, formerly of Columbia Threadneedle, echoed that view, noting banks are unlikely to face higher capital requirements from the downgrade, since regulators do not differentiate between AAA and AA1 for risk-weighting.
“From a mechanical perspective, the answer is almost certainly ‘not at all’,” he wrote in the Financial Times.
Still, there are signs of increased investor caution. Gold edged up 0.27% over the weekend to US$3,210, and early currency markets showed the US dollar slightly weaker against the euro and yen.
Carol Schleif, chief market strategist at BMO Private Wealth, noted the bond market remains acutely focused on Washington’s fiscal wrangling.
“The bond market has been keeping a sharp eye on what transpires in Washington this year in particular,” Schleif said.
Some observers pointed out that concerns about default remain largely academic, given the US government issues debt in its own currency.
“Let’s get real. If there’s one asset on this planet with the least chance of default, it’s a US Treasury bond,” said Stephen Innes, managing partner at SPI Asset Management.
“You don’t default when your central bank can conjure up settlement liquidity with a keystroke. It’s not moral hazard—it’s just an operational fact.”
Still, with yields rising and deficits deepening, investors may face another volatile start to the week as confidence in the long-term stability of US finances is put to the test once again.
