SignalPlus Macro Analysis Special Edition: What Does the US Credit Rating Dropping to AA Mean?

Moody's downgraded the U.S. long-term credit rating, which means that U.S. sovereign credit has been removed from the ranks of the AAA by all major rating agencies. This article originated from SignalPlus and was compiled, compiled and written by odailynews. (Synopsis: 30-year U.S. Treasury yields soar above 5%!) The United States loses all 3A credit reviews, investors should be nervous) (Background added: Tether has $120 billion in U.S. bonds "the 19th largest in the world" surpassing Germany, and has made $1 billion in Q1 this year) Moody's downgraded the U.S. government's long-term issuer and senior unsecured debt rating from AAA to AA1 and revised the outlook from negative to stable. The downgrade reflects the fact that over the past decade, the proportion of US government debt to interest payments has continued to rise, much higher than that of other sovereign countries with the same rating. — Moody's, May 16, 2025 Moody's downgraded its U.S. long-term credit rating, meaning that U.S. sovereign credit has been removed from the ranks of the AAA by all major rating agencies. The message came hours after the U.S. stock market closed on Friday, and it is rumored to have prompted the U.S. House of Representatives Budget Committee to rush ahead with "One, Big, Beautiful Bill" on Sunday night in an attempt to minimize potential market shocks. Political wrangling and budget bill drama aside, does credit rating still matter? As you may recall, Silicon Valley Bank (SVB) still had an "A" rating before it collapsed, and more sophisticated readers may not have forgotten the ridiculously high ratings on CDOs, CMOs, subprime mortgages and Chinese real estate bonds. In response to this topic, we have compiled the relevant highlights in the form of FAQs below: When has the United States been downgraded in the past? July 2011: S&P August 2023: Will Fitch have an immediate technical impact? For institutions that are limited by ratings and cannot hold non-AAA rated bonds Due to the size and irreplaceability of U.S. Treasuries as an asset class, these institutions often adjust their internal rules (and have done in the past). Impact on centralized clearing DTCC and CME treat treasury bonds as collateral by setting discounts (haircut) based on duration and bond type, and rely less on ratings. Impact on Money Market Funds Short-duration allocations have weakened the impact of credit ratings, and in fact demand for Treasury bills has barely fluctuated, even after past downgrades and debt limit disputes. In fact, President Trump's tariff policy and global trade restructuring have had a more profound impact on global demand for U.S. bonds than any rating agency. How has the market reacted in the past? When the rating was lowered in 2011, the market was shocked because it was the first time to be lowered and it was in the initial "debt ceiling crisis". Stocks fell about 20% in July-August, but due to safe-haven hedging and ongoing quantitative easing, the yield on the 10-year Treasury note fell by 120 basis points (i.e., higher prices) after the downgrade. In 2023, the downgrade occurred in August, just after the early summer debt ceiling crisis, and the US Treasury is recovering market liquidity by rebuilding the Treasury's general account and issuing a large number of US bonds. At that time, the SPX index fell by about 10%, and US Treasury yields continued their trend for the year by about 50 basis points. Although this credit rating downgrade may have accelerated the relative trend of the market, on the whole, it has not brought fundamental changes to the market pattern. Will this downgrade affect fiscal decisions? The House Budget Committee did move forward with the budget on Sunday evening, showing some interest in mitigating potential market shocks. Will it cut dollar spending and control the deficit? While the downgrade may give more weight to the voices of fiscal hawks, it is unlikely to change the long-term trend of runaway spending and concerns about unsustainable supply of U.S. Treasuries. This will increase uncertainty about when the bill will be finally passed/whether it will be delayed, and may weaken the potential positive effects of tax cuts due to adverse budgetary impacts. Likely market reaction this time? On the equity side, given past experience and the market's rapid rally in recent weeks in the absence of a broad leader, the short-term reaction is likely to be an instinctive decline. The trend of the bond market is more difficult to predict, depending on the extent of the decline in risk appetite in the stock market, the game between fiscal hawks and Trump, whether the Senate can successfully pass the budget before the debt limit expires, and whether this event will affect Trump's 90-day tariff truce. On the whole, U.S. stocks, U.S. bonds and the U.S. dollar may face negative risks. What are the current positions in the macro market? Most macro funds, systemic funds and quantitative funds have covered short/reduced positions, or even turned long. Last week's market saw a small "melting" rally, with traders scrambling to cover short orders, and the NYSE's Advance-Decline Line indicator hit a recent high. How did the economic data perform last week? It's pretty bad for the bond market. Despite the recent easing of tariff policy, the US consumer expectations index has fallen sharply. The overall index fell to its lowest point since June 2022 and is almost close to its lowest level since the 1980s. Long-term inflation expectations rose to their highest level since 1991 (4.6%). The 1-year inflation forecast is even higher at 7.3%, the highest level since 1981. Should the market worry about foreign sell-off? Let us look back at the past few months. Non-U.S. investors have stopped adding weight to U.S. equity funds since March and are net sellers of bond funds, a trend that is likely to continue in the short term. But in terms of practical impact, bank data shows that the total dollar assets held by foreign investors in 2024 will be about $57 trillion, a significant increase from $2.2 trillion in 1990. Of this, about 17 trillion are equity assets and 15 trillion are bonds. In other words, foreign capital holds about 20% of the total supply of US stocks and 30% of the total supply of US bonds. This is not a small amount, and it is not possible to sell or reduce its holdings sharply at will without affecting the entire capital market structure. Moreover, assets are scattered in the hands of different foreign holders, and the hasty actions of either party will involve the game reaction of other participants. As far as the stock market is concerned, the key is still the earnings performance of companies, which have performed well so far. According to JPM, the SPX index's overall earnings in the first quarter exceeded expectations by about 8%, 70% of companies have reported earnings, of which 54% have better revenue than expected, 70% have exceeded expectations, and Mag-7's EPS growth is as high as 28%, far ahead of the index. In terms of holding structure (regardless of vague offshore structures such as Cayman), the UK, Canada and Japan are currently the world's top three US asset holders, and they are all close allies with the US. China ranks only fourth, accounting for about 4%, which is significantly lower than the 8 – 9% of the previous group. According to the trend of the past month, Japanese investors did reduce the size of U.S. bonds, but at the same time significantly increased the size of U.S. stocks, so this is more like an asset allocation adjustment than a true de-dollarization. In short, a large-scale withdrawal or de-dollar flow should be unlikely in the short term. How are cryptocurrencies performing? Interestingly, despite the fact that gold prices have been high since ...