What does the U.S. credit downgrade mean?

U.S. Credit Rating Downgrade

On May 16, 2025, Moody’s downgraded the United States’ long-term credit rating from Aaa to Aa1, maintaining a stable outlook.

This decision reflects the sustained deterioration of the country’s fiscal metrics over more than a decade, with persistent deficits, increasing debt, and a growing burden of interest payments.

It is projected that:

• the federal deficit will reach 9% of GDP by 2035 (up from 6.4% in 2024),
• the debt-to-GDP ratio will rise from 98% to 134%,
• interest payments could consume up to 30% of federal revenues, compared to the current 18%.

Despite this downgrade, Moody’s highlights that, despite these weaknesses, the U.S. maintains exceptional strengths: a large and dynamic economy, the dominant role of the dollar as the global reserve currency, an independent Federal Reserve, and a solid institutional system.

The stable outlook reflects the balance between these positive factors and fiscal deterioration, although it warns that a loss of institutional effectiveness or a faster-than-expected worsening could justify future downgrades.

What is a Credit Rating?

A credit rating is a score assigned by agencies like Moody’s, S&P, or Fitch to indicate how trustworthy a country or company is in repaying borrowed money.

It functions like a “school grade” for finances. The higher the rating, the lower the risk of default. For example:

• Aaa or AAA: the highest rating, indicating minimal risk.
• Aa1, Aa2, A1, etc.: still good, but with slightly higher risk.
• Lower ratings, like B or C, indicate a higher probability of default.
• The average quality is also referred to as “Investment Grade,” considered safe despite higher risk.
• D indicates a default situation.

A downgrade in the credit rating, like the recent one for the U.S., implies that markets perceive greater risk in its economy. This situation could force the country to increase interest rates when issuing new debt.

The credit rating is related to the risk premium of bonds.

What is the Impact of the Credit Rating Downgrade?

Historically, rating downgrades have had limited effects on financial markets, as investors continue to consider U.S. Treasury bonds as safe assets.

For context, another major rating agency, S&P, downgraded the U.S. debt rating in 2011, and Fitch did the same in 2023. In the past, investors have tended to downplay these downgrades: the effect on the S&P 500 has been negligible, even in this recent case, as observed in the following chart, and bond yields barely reacted.

In fact, Moody’s was until now the exception, having not yet downgraded the U.S. credit rating. However, this downgrade could have a greater impact due to the current context of fiscal and political concerns.

As shown in the chart, the yield on the 30-year U.S. Treasury bond has surpassed 5%, amid a global environment of rising yields. The recent increase in Japanese yields is particularly notable, given the country’s high debt levels.

What Does This Mean for Your Portfolio?

In our opinion, the credit risk in the sense of a possible default by a country like the United States is very low, since it can always print money to pay its debt. The problem, in any case, would be a possible loss of investor confidence, which could affect the value of its currency.

In any case, exposure to US government bonds is very limited in our diversified portfolios of indexed funds or ETFs in Euro.

For the aggressive bond portfolio, we maintain exposure to the global index, although we have recently decided to hedge exposure to dollar debt due to the increasing currency risk. Prudent bond portfolios and target portfolios have no exposure. All our portfolios maintain investment-grade or higher credit quality in most cases.

In any case, the investment committee will continue to closely monitor the evolution of financial markets as always.

Annex: About credit rating agencies

Credit rating agencies — mainly Moody’s, S&P, and Fitch — play a key role in financial markets by evaluating the ability of issuers, including sovereign states, to meet their debt obligations. Their ratings influence the cost of financing and the decisions of many institutional investors.

However, their reputation was seriously damaged after the 2008 financial crisis. These institutions were harshly criticized for failing to anticipate the real risks of structured financial products that they themselves had rated highly, and for possible conflicts of interest, as they were paid by the issuing entities. Since then, although they have introduced some internal and regulatory reforms, their independence, and usefulness remain questioned in certain contexts.

Therefore, although their decisions still make headlines and can have short-term effects on markets, many sophisticated investors consider them only one factor — and not necessarily the most important — in their country risk analysis.