Dow Jones posts modest gains as U.S. debt downgrade shakes Wall Street

U.S. stock indices were mixed, treasury yields spiked, as Moody’s downgraded the U.S. credit rating.

Major U.S. stocks were mixed after a credit agency dealt a blow to U.S. public finances. On Monday, May 19, the Dow Jones was trading at 42,676 points, up 21.91 points or 0.05% from the market open. The S&P 500 was at 5,944, down 0.24%, while the tech-heavy Nasdaq traded at 19,139, down 0.37%.

The decline came after Moody’s, one of the biggest credit rating agencies, downgraded the U.S. credit rating from Aaa to Aa1. The move brings the firm’s rating in line with that of Standard & Poor’s and Fitch, which downgraded the rating in 2011 and 2023, respectively.

As a result of the downgrade, U.S. Treasury yields spiked dramatically. The 30-year Treasury yield spiked to 5.03%, the highest level since November 2023. The 10-year and the 2-year Treasury yields increased to 4.5% and 3.993%, respectively.

The U.S. has an ongoing debt problem: Moody’s

The U.S. credit rating is significant because it directly impacts the cost of government borrowing. When Treasury yields spike, the U.S. government has to pay more in interest on any newly issued Treasuries. This can create a vicious cycle where the interest cost hurts the ability to pay, causing investors to look elsewhere and increasing borrowing costs even further.

Moody’s cited escalating government deficits as the reason for the downgrade and stated that these have been a problem for a while. What is more, the agency directly referenced the possibility of extending 2017 tax cuts, which could add $4 trillion to the deficit.

“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” Moody’s analysts.