Stock Futures, Treasuries Drop After US Downgrade: Markets Wrap

This content was published on May 19, 2025 - 07:55

6 minutes

(Bloomberg) — US equity-index futures dropped and the Treasury yield curve steepened after Moody’s Ratings stripped the US government of its top credit rating, citing a ballooning budget deficit it said showed little sign of narrowing. Gold rose.

Contracts for the S&P 500 dropped 1.1% and those for the Nasdaq 100 declined 1.3% as the ratings were cut one level to Aa1 from Aaa Friday. Longer-dated Treasury yields gained to touch the psychological 5% level. A gauge of the dollar weakened 0.2%. European stock futures were little changed and Asian shares fell. Bullion rose 0.4% with appetite for the haven asset boosted by concerns about the US economic outlook and budget deficit.

The downgrade risks reinforcing Wall Street’s growing worries over the US sovereign bond market and revives the ‘Sell America’ concerns triggered by President Donald Trump’s trade war. The rating cut comes as Capitol Hill debates even more unfunded tax cuts and the economy looks set to slow as Trump upends long-established partnerships and re-negotiates trade deals.

The rating cut will add to “growing concerns about the loss of US exceptionalism and make non-US assets more appealing to global stock investors who have been rotating out of US equities into other markets like European equities,” said Vasu Menon, managing director of investment strategy at Oversea-Chinese Banking Corp. in Singapore.

Moody’s joined Fitch Ratings and S&P Global Ratings in grading the world’s biggest economy below the top triple-A position. The one-notch cut comes more than a year after Moody’s changed its outlook on the US rating to negative. The credit assessor now has a stable outlook.

While Moody’s recognized the US’ significant economic and financial strengths, it no longer fully counterbalances the decline in fiscal metrics, the ratings company said. Treasury Secretary Scott Bessent downplayed concerns over the US’s government debt and the inflationary impact of tariffs, saying the Trump administration is determined to lower federal spending and grow the economy.

On Monday, 10-year Treasury yields climbed three basis points to 4.50% and their 30-year equivalents briefly rose about six basis points to 5.00%, before the gains pared. A move through 5% for the longer-dated benchmark would put levels last seen in 2023 in play — they peaked that year at 5.18%, the highest since 2007.

Shorter-dated yields are more sensitive to the path of US interest rates, with their longer-maturity counterparts influenced by expectations about the trajectory of America’s massive debt pile.

“Moody’s downgrade is more symbolic than a fundamental shift,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. “But it does chip away at confidence, especially with debt and deficit concerns front and center. There’s a risk that this gets politicized.”

A key House committee advanced Trump’s giant tax and spending package after Republican hardliners won agreement from party leaders to speed up cuts to Medicaid health coverage. The House Budget Committee approved the legislation late Sunday night after a weekend of negotiations with four ultraconservatives on the panel who on Friday joined with Democrats to reject the legislation.

Meanwhile, UK and European Union negotiators worked into Sunday evening in a bid to reset post-Brexit relations under Keir Starmer’s Labour government ahead of a summit in London.

In geopolitical news, Russian President Vladimir Putin believes he has a strong hand ahead of a phone call Monday with Trump and European leaders are trying to prevent the US president from rushing through a deal.

European Central Bank President Christine Lagarde said in an interview published with La Tribune Dimanche that the dollar’s recent decline against the euro is counterintuitive, but reflects “the uncertainty and loss of confidence in US policies” among certain segments of the financial markets.

While US assets rallied in response to previous US downgrades from Fitch and S&P, “it remains to been seen whether the market reacts differently as the haven nature of Treasury and the US dollar might be somewhat uncertain,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management.

In Asia, China’s industrial output expanded faster than expected in April while consumption disappointed, highlighting the challenges facing the economy despite a quick de-escalation of trade tensions with the US. Meanwhile, China shrank its holdings of US Treasuries in March, with the UK replacing it as the No. 2 overseas owner.

Stocks