MW Bond yields jump after Moody's downgrade of U.S. credit. Why it matters for consumers - and Congress.

By Joy Wiltermuth

Yields in the Treasury market are rising, threatening to make it more expensive for consumers and the U.S. to manage debt

The roughly $29 trillion Treasury market was dealt another big blow on Monday as bond yields jumped after Moody's decision on Friday to strip the United States of its last set of AAA credit ratings.

While the Moody's decision wasn't necessarily a surprise to Wall Street - Fitch Ratings and S&P Global slashed their top AAA ratings for the U.S. years ago - the fresh downgrade comes at a particularly tricky time for the Treasury market.

Foreign demand for Treasurys has been waning since the November elections returned Donald Trump to the White House and gave Republicans control of Congress, fueling concerns of a potential increase in the U.S. deficit to help pay for lower taxes.

Then came Trump's April 2 tariffs, which shocked global trading partners, fueled a "sell America" trade that's expected keep pressure on Treasurys and other dollar-denominated assets DXY, and rekindled fears of untamed inflation.

"Global investors are thinking twice before buying Treasury securities," Brian Rehling, head of global fixed-income strategy at the Wells Fargo Investment Institute, said in an interview Monday. "Thus rates have moved higher."

The 30-year Treasury yield BX:TMUBMUSD30Y briefly traded above 5% early Monday before easing back to 4.95%, while the 10-year yield BX:TMUBMUSD10Y was up 4 basis points to 4.48%, according to FactSet.

Rising yields can translate to higher borrowing costs for consumers, businesses and the U.S. government. The latest march upward for yields comes at a crucial moment for Republicans as they look to advance their "big, beautiful" tax and spending bill. It was estimated recently that the legislation would add $3.3 trillion to the U.S. debt over the next 10 years, but that remains a moving target, as the bill could face pushback in the Senate.

"The consumer, of course, has been paying higher borrowing rates for some time now," Rehling said, pointing to inflation, higher interest rates and the increase in the U.S. deficit since the pandemic. As long as the economy and the job market hold up, however, he thinks consumers can manage.

"The bigger issue is, can the U.S. government tolerate higher rates on a more sustained basis?" he said, pointing to interest expenses that in recent years have eaten up a bigger slice of the federal government's budget.

Longer-duration Treasurys have been hit particularly hard lately as investors rethink how safe these securities look from a long-term standpoint, as well as how much yield they need in order to operate as a long-term U.S. creditor.

Adam Abbas, a portfolio manager at Harris Oakmark, said the Republican tax bill has rekindled debate about the sustainability of the U.S. deficit and spending programs, as well as the "exceptionalism" Treasurys and other U.S. assets have enjoyed on the global stage.

Read: El-Erian says the era of U.S. exceptionalism is on pause

Abbas thinks U.S. exceptionalism will hold - perhaps in a diminished form - but he anticipates the deficit will remain a problem without an easy solution. "I do think the deficit, at some point, there's going to have to be a serious undertaking, not just cuts around the edges," he said.

Read: Is America the next Cyprus? Only one other double-A rated country has ever defaulted.

A BofA Global rates and currency team led by Mark Cabana said they expect the Senate to make amendments to the tax and spending bill that could "water down" proposed House spending cuts and present another "speed bump" for its timeline.

Republicans initially had a goal of getting the bill to Trump's desk for signing by Memorial Day.

"It also would result in a bill that adds even more to the deficit than what the House is considering," Cabana's team said in a Monday client note. They foresee a path for the final bill to add $5 trillion to $6 trillion to the deficit.

The U.S. deficit was pegged at 6.28% of gross domestic product at the end of 2024, but the BofA teams expect it to grow to 7% to 8% over the next decade.

U.S. stocks were shrugging off earlier losses, with the blue-chip Dow DJIA up 0.4%, the S&P 500 SPX 0.1% higher and the Nasdaq Composite COMP roughly unchanged, according to FactSet.

-Joy Wiltermuth

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May 19, 2025 13:35 ET (17:35 GMT)

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