- Despite Moody’s Investor’s Service’s warning on Friday that it was lowering its ratings outlook on Treasurys, markets on Monday showed minimal reaction to the news.
- Michael Reynolds, a Glenmede strategist, downplayed Moody’s announcement, stating that the agency’s insight didn’t offer any new information about the U.S. government.
- Of the big-three agencies, Moody’s is the only one still maintaining a triple-A rating on U.S. debt.
Traders work on the floor of the New York Stock exchange during morning trading on November 10, 2023 in New York City.
Michael M. Santiago | Getty Images
In the past, negative news about U.S. debt would send the markets into a panic, but this month, the reaction was subdued.
Moody’s downgrade of the ratings outlook on Treasurys due to high government debt levels and deficits, combined with political turmoil in Washington, failed to cause significant market ripples on Monday.
Warnings from Standard & Poor’s and Fitch in the past had a short-lived impact on Wall Street, unlike the current market indifference to Moody’s position.
According to Michael Reynolds, vice president of investment strategy at Glenmede Investment Management, if the U.S. debt is downgraded from triple-A to double-A, it would have little practical significance.
Regarding the $33.7 trillion U.S. debt and the $1.7 trillion deficit in fiscal 2023, Reynolds commented that these are well-known concerns for Wall Street.
Despite Moody’s warning, the agency remains the only one among the big-three that has not downgraded U.S. debt, which Fitch and S&P have done previously.
On the heels of weak auctions of 10- and 30-year paper earlier last week, investor concern over the government’s long-term financial capability to pay its debts has been heightened. Fiscal 2022 witnessed taxpayers shelling out $659 billion in net interest on the debt, while October 2023 marked a deficit of over $66.5 billion for the first month of the 2024 fiscal year, according to a report by the Treasury Department.
Glenmede currently has a cash overweight and is exploring opportunities to buy longer-dated Treasurys as they anticipate a possible upcoming recession in the U.S., which would suppress yields and make longer-duration paper more attractive.
With skepticism around bonds, particularly if inflation remains high and the Federal Reserve keeps benchmark interest rates elevated, Fed Chair Jerome Powell’s recent comments about the central bank’s commitment to fighting inflation have also rattled markets. Analysts are awaiting this week’s inflation reports on consumer and producer prices for further clarity.
Retail interest in lower rates seems to be growing, as evidenced by the $42.2 billion iShares 20+ Year Treasury Bond ETF, which saw an inflow of $831.6 billion in November, according to FactSet.
