U.S. Credit Downgrade Triggers Market Turmoil: Treasury Yields Rise, Dollar and Stocks Slip

Markets responded sharply after Moody’s downgraded the U.S. sovereign credit rating late Friday, citing concerns over surging deficits and unchecked debt. Treasury yields climbed, with the 10-year note reaching 4.51% and the 30-year surpassing 5%, while U.S. stock futures and the dollar both dropped. The downgrade triggered global ripple effects, dragging down Asian and European stocks, reflecting broader concerns about economic stability and U.S. fiscal policy.

Tensions around the U.S.’s $36 trillion debt were exacerbated by a proposed Republican tax bill, expected to add another $3–5 trillion over the next decade. Economists warned that the rising debt burden, combined with partisan gridlock, is contributing to increased borrowing costs. Treasury Secretary Scott Bessent dismissed the downgrade in weekend interviews but simultaneously warned of intensified tariffs on trade partners that fail to negotiate in “good faith.”

Uncertainty surrounding U.S. tariff policy, particularly President Trump’s recent actions, added to investor unease. Economists estimate the effective tariff rate is equivalent to a 1.2% GDP tax increase, weighing on consumer sentiment. Trump’s demand that retailers like Walmart absorb rising costs may further pressure corporate margins. Analysts are now watching upcoming earnings from retailers like Home Depot and Target to assess the impact on consumer behavior.

European and Asian markets mirrored the U.S. downturn, with broad declines in major indices and weaker-than-expected Chinese retail sales. Despite a recent rally following Trump’s tariff pause on China, futures for the S&P 500 and Nasdaq dropped over 1%. Meanwhile, economic data continues to reflect global fragility, and investors remain skeptical about U.S. monetary and trade strategies amid ongoing volatility.

Despite rising yields, the dollar weakened, driven by diminished confidence in U.S. fiscal direction and policy volatility. The euro and yen both gained against the dollar, while gold rebounded as a safe haven, and oil prices dipped on concerns about future supply. The Federal Reserve’s stance is now in focus, with markets pricing in fewer rate cuts than previously expected and key Fed speakers set to influence sentiment throughout the week.

Source: Reuters