The US was stripped of its final triple-A credit rating when Moody’s downgraded the nation’s government debt, turning the spotlight on fiscal risks and their impact on asset prices. Moody’s was the last of the three major credit-rating agencies to downgrade the US by one notch after S&P and Fitch issued downgrades in 2011 and 2023, respectively. In its report last Friday, Moody’s cited “large annual fiscal deficits and growing interest costs,” noting that this trend has persisted through multiple US administrations. The downgrade landed as Republicans on Capitol Hill continued working on a bill that would enact tax and spending cuts. With talks over the federal budget ongoing, the ultimate scope of spending cuts and the bill’s impact on annual deficits could be instrumental in shaping the outlook.

Risks associated with loose fiscal policies around the world have recently contributed to higher yields on government debt, wider credit spreads, and a weaker dollar. The 30-year Treasury yield surpassed the 5% threshold during trading this week, while the benchmark 10-year yield hovered around 4.5%, as news of the credit downgrade brought concerns over the US’s balance sheet and inflation to the forefront. A 20-year Treasury auction on Wednesday attracted weaker-than-expected demand, triggering a fresh selloff that pushed yields higher.  PGIM Fixed Income takes a closer look at fiscal policy, implications for interest rates, and three market themes for investors to consider in the latest version of Weekly View from the Desk.