US Debt Crisis: Borrowing Costs Soar as Moody’s Downgrade Rattles Markets

Global Markets Reel as US Credit Rating Cut Sparks Dollar Slump and Rising Yields

Borrowing costs surged worldwide as investors reacted to growing fears over America’s $27 trillion debt burden, following Moody’s decision to downgrade the US credit rating. The move has sent shockwaves through financial markets, pushing Treasury yields to 18-month highs and triggering a dollar sell-off.

Key Market Reactions:

• US 30-year Treasury yields surged past 5%, a critical psychological barrier rarely breached in two decades.

• UK gilt yields climbed to 5.5%, while Japan’s 30-year bond yields hit a 25-year peak at 2.99%.

• The dollar tumbled, with sterling briefly rising above $1.34.

• Global stock markets initially slumped before recovering, with the FTSE 100 closing up 0.2% and US indices posting modest gains.

Why the Downgrade Matters

Moody’s stripped the US of its AAA credit rating, lowering it to AA1—the first such cut since 1917. The agency cited rising debt levels, soaring interest costs, and political gridlock over fiscal responsibility. This follows similar moves by Fitch (2023) and S&P (2011), signaling long-term concerns over US debt sustainability.

Trump’s Tax Cuts Fuel Debt Fears

Market anxiety intensified after Donald Trump’s proposed tax cuts cleared a key legislative hurdle. Analysts warn the plan could add $3to$5 trillion to the US deficit, worsening the debt crisis.

Ed Monk (Fidelity International) warned: “The bond market is flashing red. If the US government wants to borrow for 30 years, it must now pay 5%—a rate that impacts global borrowing costs, including the UK.”

Global Ripple Effects

• Higher US Treasury yields push up mortgage and loan rates worldwide, squeezing households and businesses.

• UK Chancellor Rachel Reeves faces tough choices, with tax hikes likely to balance the books.

• Emerging markets could suffer as investors flock to safer assets.

What’s Next?

With Trump’s tax plan advancing and debt fears mounting, markets remain on edge. Analysts warn of further volatility if Washington fails to address its spending crisis.

Susannah Streeter (Hargreaves Lansdown): “Tax cuts could deepen the deficit, making Moody’s downgrade just the start.”

David Morrison (Trade Nation): “This comes at a critical time—amid a global trade war and ballooning US debt.”