Download the 06.02.25 Dynamic Bond Market Update for advisors’ use with clients

By Bill Smith, Fixed Income Trader and Portfolio Manager

Moody’s downgraded the United States credit rating to Aa1 from AAA and revised the outlook to stable from negative on May 16. The market reaction has been relatively muted, partly because the possibility of a downgrade was well-telegraphed. Moody’s announced a negative outlook on the U.S. over 18 months ago. Further, the rationale behind the downgrade, including “the increase over more than a decade in government debt and interest payment ratios,” reflects well-known challenges recognized by other rating agencies. For example, Fitch downgraded the U.S. to AA+ from AAA in 2023, while S&P lowered its rating to AA+ from AAA in 2011. In this context, the latest move by Moody’s doesn’t provide new information but serves as a reminder that the U.S. will ultimately need to get its fiscal house in order.

The United States Remains a Solid Credit

In its downgrade note, Moody’s observed that the U.S. “retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the U.S. dollar as global reserve currency” — a view we share. The U.S. Treasury market remains the world’s largest and most liquid, serving as the bedrock of the global financial system. While rising debt levels and interest costs may pose long-term challenges, we don’t believe this downgrade signals an inability or unwillingness to meet its financial obligations.

Yields Track Lower After Downgrade

In the two weeks since Moody’s rating action, U.S. Treasuries have rallied modestly, with yields slightly down across major tenors, as illustrated in the table below. While we expect fixed income volatility to remain high in the near term, fears of an immediate shock in the U.S. Treasury market after the U.S. downgrade have failed to materialize.

Source: Bloomberg. Past performance is not a guarantee of future results.

While Moody’s downgrade marks the end of the U.S.’s last AAA credit rating, it does little to alter the underlying fundamentals. The U.S. continues to benefit from unparalleled economic strengths and the unique status of the dollar and Treasury market in global finance. The muted market response reflects this enduring confidence — however, the fiscal challenges highlighted by Moody’s remain real and will need to be addressed over time to sustain that credibility.

Fixed income. Flexible thinking.

A prudent approach to fixed income investing calls for diversification across both credit and duration exposure. As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.

Should you need help navigating fixed income for your clients, contact Dynamic’s Asset Management team at (877) 257-3840, ext. 4, or assetmanagement@dynamicadvisorsolutions.com.

Bill Smith serves as president, Portfolio Management & Trading, of Harmont Fixed Income in Phoenix.

Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.