Despite the decline in the ratings outlook of U.S. Treasury by Moody’s Investor’s Service, markets on Monday seem to be unfazed. This warning was issued on Friday and warned of the potential negative impacts of high levels of government debt, deficits, and political brinksmanship.
This move from Moody’s comes after similar warnings from Standard & Poor’s and Fitch, which did initially cause shockwaves through Wall Street. However, it appears that the current fiscal and political unrest has rendered these warnings as ineffective.
Many market experts have dismissed the Moody’s warning as a “nonevent.” “If we go from triple-A to double-A, what does that practically mean? It doesn’t really mean anything. There’s still going to be demand for U.S. Treasurys en masse,” said Michael Reynolds, vice president of investment strategy at Glenmede Investment Management.
Despite concerns of the $33.7 trillion U.S. debt and the $1.7 trillion deficit in fiscal 2023, these are issues Wall Street is well aware of and deals with daily.
The Moody’s news has not had much impact on the markets, with major stock market indexes posting muted gains and long-dated Treasury yields rising slightly.
However, the weak auctions of 10- and 30-year paper last week have served as a reminder to investors about the long-term ability of the government to pay its bills. There has been growing concern about incremental issues in the fixed-income markets, with some experts believing that a recession may be on the horizon.
In light of these concerns, many investors have been adding to their position in the long-term Treasurys and the $42.2 billion iShares 20+ Year Treasury Bond ETF has seen an influx of $831.6 billion in November.
Fed Chair Jerome Powell’s reminder that the central bank remains committed to inflation fight and could yet hike rates even more has also caused some skepticism about bonds. The upcoming inflation reports on consumer and producer prices will also play a significant role in shaping the demand for Treasurys.
Overall, despite the warnings from Moody’s, the impact on the markets has been minimal, and it remains to be seen how this recent development will affect future market trends.