There was a time when bad news about U.S. debt would send markets into a tailspin, but not this month.
Markets on Monday shrugged at a warning Friday from Moody’s Investor’s Service that it was lowering its ratings outlook on Treasurys. The big-three ratings agency said high levels of government debt and deficits coupled with political brinkmanship in Washington could jeopardize the global standing of government-issued fixed income.
When Standard & Poor’s and Fitch issued similar warnings, they sent at least temporary shockwaves through Wall Street.
But with the domestic fiscal and political mess seemingly old news, the ratings service saber-rattling just doesn’t seem to have the same impact.
“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. “There’s no piercing insight from Moody’s that they have proprietary information that nobody knows about the U.S. government. So, it’s really a nonevent.”
Indeed, no one has to tell investors about the $33.7 trillion U.S. debt and the $1.7 trillion deficit in fiscal 2023. Both are well-known issues with which Wall Street wrestles daily.
The Moody’s news merely echoes those problems. Despite its warning, the service is the only one of the big-three agencies that still has a triple-A rating on U.S. debt; Fitch lowered its rating in August, and S&P made its move 12 years ago.
Things were relatively quiet in the markets Monday, the first trading day after the Moody’s announcement that it was taking its outlook to negative from stable. Major stock market indexes posted muted gains, while yields on long-dated Treasurys rose slightly.
Auction concerns
Earlier last week, markets were jostled by weak auctions of 10- and 30-year paper, a reminder that investors are concerned about the long-term ability of the government to pay its bills. Net interest on the debt for fiscal 2022 cost taxpayers $659 billion. In October 2023, the first month of the 2024 fiscal year, the deficit totaled more than $66.5 billion, the Treasury Department reported Monday.
“People are incrementally starting to think about that,” Reynolds said of the issues in the fixed income markets. “Is there a moment within the next couple of years where this really hits an apex point and things get out of control? Probably not. But it’s it’s one of those things that’s just going to keep nagging at us until politicians get serious about fixing some of these issues.”
Reynolds noted that Glenmede is currently overweight cash and is looking at opportunities to start buying into longer-dated Treasurys. The latter move is based on the firm’s belief that the U.S. is likely headed for recession, which presumably would knock down yields and make longer-duration paper more enticing.
There’s still skepticism, though, about bonds, particularly if inflation stays elevated and the Federal Reserve holds benchmark interest rates high. Fed Chair Jerome Powell last week also rattled markets when he issued a reminder that the central bank remains committed in its inflation fight and could yet hike rates even more.
“While we see room for an improved demand backdrop, it hinges on greater conviction in the end of the Fed hiking cycle,” Meghan Swiber, rates strategist at Bank of America, said in a client note Monday. “This can be confirmed or rejected by this week’s data” which will include inflation reports on consumer and producer prices.
Investors apparently have been making some retail bets that rates could start falling: The $42.2 billion iShares 20+ Year Treasury Bond ETF has taken in $831.6 billion in fresh cash in November, according to FactSet.
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