Downgraded U.S. Government Debt

Moody’s credit rating agency downgraded U.S. government debt from AAA to AA1 on May 16, 2025. Although troubling, this isn’t dramatic on its own, as the two other major credit rating agencies downgraded U.S. government debt previously. S&P credit downgraded U.S. government debt in 2011, and Fitch credit downgraded it in 2023, so the debt path has been clear. We believe this is just another indicator of the fiscal strains the U.S. is experiencing now. 

In 2024, the U.S. ran a deficit of $1.8 trillion. Meaning we spent that much more than we received in tax or tariff revenue, and it had to be borrowed by selling U.S. treasuries. In 2023, the deficit was only slightly less at $1.7 trillion. This is why the national debt has soared in recent years to the tune of $36 trillion owed to lenders. This level of debt means that the U.S. must pay those lenders interest on the loans to the tune of $1.2 trillion paid in 2024, and 2023 was only slightly lower at $875 billion paid.

Why Credit Rating Agencies Downgraded U.S. Government Debt

The credit rating agencies lowered their rating of U.S. government debt because, as the amount of total debt gets higher, the ability of the borrower to make the principal and interest payments comes into question. The U.S. has an annual Gross Domestic Product (GDP) of $29.2 trillion in 2024, but GDP isn’t the primary driver of debt payments. The debt payments come from the annual budget, which, as we’ve shown, has seen large deficits in recent years. 

Looking at it a slightly different way, the budget deficit in 2007 was approximately 6% of the Federal government’s spending. By 2019 (the year before COVID) the deficit had grown to 22% of Federal government spending and as of 2024 it is now 27% of Federal government spending. This helps us visualize the growth of spending and deficits over the past decade. The deficits we’ve illustrated lead to questions about whether a borrower can make payments. 

Effects of Ongoing Deficits

When a country runs a deficit, it relies on borrowing to pay the uncovered costs. In the case of the U.S., this means we must sell U.S. Treasuries to secure those loans. And if the rest of the world starts questioning whether buying Treasuries is a good strategy, then making the payments gets a lot harder. So far, the world appears to be content with buying U.S. Treasuries, but with a growing debt that may start to come into question. Lack of interest in purchasing U.S. Treasuries would result in a financial crisis we don’t even want to imagine. This is the essence of lowering the U.S. credit rating.

Ongoing deficits have another damaging effect on the U.S. economy: higher interest rates. If you go back before the recent bout of inflation in early 2022, 10-year Treasury bonds had an interest rate of about 1.9%. Now, following the inflation and increase in overall interest rates, the rate has risen to approximately 4.5%. This is because, as rates go up, if Treasuries did not pay a competitive rate, then no one would buy them. Therefore, Treasury rates had to increase as the Federal Reserve (Fed) raised interest rates to combat inflation. 

Correspondingly, as rates rise, the amount of interest payable to lenders also increases. This is why interest rate payments in the last two years have been so high. More challenging is that if the Fed decides to start lowering interest rates and Treasury rates begin to decline, the incentive to buy U.S. Treasuries will decrease, again suggesting that we might face challenges in selling Treasuries and covering our deficits. 

Here again, with such large budget deficits and a large outstanding debt, the flexibility to lower interest rates is constrained, and the economy suffers because of it. We are nowhere near having Treasury sale problems, but this budget and debt situation is part of the reason why the credit agencies have lowered the U.S. credit rating.

One Big Beautiful Bill

Speaking of budget deficits, the U.S. Congress is wrestling with Donald Trump’s One Big Beautiful Bill, which captures the budget requirements and funding of the Federal government for the next fiscal year. This bill is expected to increase the U.S. debt by over $2 trillion over the next 10 years. So, not an example of the U.S. reigning in its spending. To be fair, this is a Reconciliation bill that deals directly with the Federal budget and is not a place where major spending reductions would be included. It is the preferred method for Congress as it only requires a 51-vote majority to pass. 

Spending cuts would need to be implemented through a different type of bill, known as an Appropriations bill. This is more difficult legislation to pass, as it requires a full 60-vote majority, and that is not easy in our current political system. There are rumors of an Appropriations bill to follow the One Big Beautiful Bill, but they are just rumors at this time. We don’t think Donald Trump is the type of leader who will address spending during his term. We hope it comes to the forefront sometime in the future.