US debt downgrade drives up borrowing costs

Historically, the US government has been shielded from having to pay high interest rates, because Treasuries have been considered safe.

That is because the US economy has been strong, with stable prices, and the US government was considered a reliable partner, unlikely to default.

The yields on 30-year Treasuries hovered around 3% for much of decade following the 2008 financial crisis.

When it crossed 5% in October 2023, it was the first time it had hit that threshold in 16 years.

The yield on 30-year Treasuries climbed to 5.04% on Monday, up from 4.9% on Friday before the downgrade, before falling back under the 5% mark.

So what are the new risks?

Yields started rising in 2021, as the US was hit by soaring prices after the Covid-19 pandemic.

Concerns reignited last month, after President Donald Trump’s imposition of tariffs globally, which analysts said would hurt the economy and drive up prices.

At the same time, the US has been running up its debt, with little sign of slowdown in sight.

On Friday, Moody’s downgraded the US government’s credit rating, external, citing the growing debt and little progress toward resolving it.

The move was not unexpected. Moody’s was the last of the three rating agencies to take the step and had warned in 2023 that this might happen.

But the situation it described was underscored when part of Congress voted on Sunday to advance a tax bill that would add at least $3tn to US debt over the next decade.

The “Moody’s downgrade is, effectively, a political assessment, as much as it is an economic one”, wrote Macquarie Bank analyst Thierry Wizman.

“The political and institutional breakdown – in regard to the US’s lack of capacity to ‘course correct’, is the true meaning of the downgrade, rather than the high debt load itself.”