U.S. Rating Downgrade Not as Worrisome as Trump's Corporate Tariff Warning
A credit rating downgrade for the U.S. is turning heads but the timing seems odd.
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The government budget for 2026 will be a crucial steppingstone for the growth that this presidential administration is expected to deliver. It is a primary focus.
In the meantime, I am not too concerned about the ratings downgrade.
I am, however, a bit concerned about the messaging from D.C. from this past weekend, where signaled potentially “eating the tariffs” and seemed overly comfortable in trying to force companies to behave in a certain way that would fit the administration, but wouldn’t be good for earnings.
Not Too Worried About U.S. Rating Downgrade
Moody’s, a Nationally Recognized Statistical Rating Organization (NRSO), officially they are not rating “agencies,” dropped the U.S. from a AAA credit rating.
I don’t expect a major market reaction (in either the bond or equity market) from this action.
Treasuries are typically included in investment guidelines, specifically not by ratings. There should be very few (if any) buyers of treasuries who can no longer buy treasuries, or even need to reduce their allocation, because one agency changed their rating.
Some ratings “derived” from the U.S. government rating could be changed due to this downgrade, but again, the impact should be minimal. Most bond indices rely on two out of three agencies, and S&P and Fitch both had the U.S. rated below AAA for some time.
But the timing seems odd.
The U.S. rating isn’t something I spend a lot of time thinking about (since I think any downgrade impact is minimal, at most) but this seemed a bit “out of the blue.”
DOGE, while not wildly successful (we didn’t reach the trillions in government cuts hoped for), saw some progress. Higher current yields mean the debt we roll over has an average coupon that is higher than what is being replaced, but this is nothing new. The deficit is large and growing, but that is nothing new. The 2026 budget proposal is working its way through the system. While it does look like it will increase the deficit, it is not yet a done deal, so it seems a bit premature to cut the rating until that is decided.
While I don’t like the timing of the downgrade and I don’t think the downgrade in and of itself is a big deal, the rationale isn’t wrong. That is why I’m getting a little more nervous about 10s being even up near 4.5%. My range is going higher to 4.3% to 4.7%, with a chance of hitting 5% if long bond “basis trade” selling gets triggered again.
Equities have priced in a lot of good news, and some of the “retail” ETFs I focus on (like TQQQ) are showing outflows. Retail was better at buying the dip than many institutions, so I’m taking the fading interest by retail seriously up here — as we might now have hit highs on “deals” and “tariff capitulation.”
One thing I can say, is that the University of Michigan CONsumer CONfidence report (you can tell I’m not a huge fan) is showing the biggest divergence between Republicans and Democrats that I’ve seen. While maybe it is “OK” to let political leanings amplify responses to surveys, be careful not to let them influence your investment decisions too much!
Despite my recent optimism about the Trump put and Trump pivot, I’m nervous again as I don’t like the direction the rhetoric out of D.C. seems to be headed.
Good luck and we will continue to be moved by headlines. The responses to every headline are less dramatic than they were a few weeks ago, but still large enough that we need to manage around.
