By Ion Jauregui – ActivTrades Analyst
A Warning Bell for the Financial System
Friday, May 16, 2025, may go down as the moment global confidence in U.S. sovereign debt turned on its head. In an unprecedented move after months of debate in Washington and on Wall Street, Moody’s Ratings downgraded the U.S. credit rating from Aaa to Aa1, stripping the Treasury of its last “Triple A” hallmark. According to the agency, runaway federal borrowing has reached unsustainable levels, and interest costs could drive the public deficit up to 9% of GDP over the next decade.
The news set off alarms in seconds. In after-hours trading, the SPY—the ETF mirroring the S&P 500—saw all its gains vanish in an instant, while the yield on the 30-year Treasury spiked to nearly 5%, a threshold that in past crises has rapped on the doors of both the White House and Congress.
Echoes of 2011
Inevitably, minds returned to August 2011, when Standard & Poor’s slashed the U.S. rating. Then, the S&P 500 plunged 10%, and the long-bond fund TLT rallied by a similar margin. Although today’s geopolitical and economic backdrop—marked by renewed tensions and a post-pandemic realignment—is different, that episode offers a stark reminder of how quickly faith in the U.S. Treasury can evaporate.
Vulnerability Factors
Fiscal weakness is compounded by rampant retail optimism. Individual investors have purchased U.S. equities for 21 consecutive weeks—the longest streak on record, far surpassing the previous high in 2022. While this buying spree signals confidence, it also carries the risk of a sharp correction if faith in the government’s solvency falters, potentially triggering systemic fallout.
Adding to the strain, China drastically cut its Treasury holdings in March, relinquishing its spot as the second-largest creditor to the United Kingdom. More than a mere portfolio tweak, this move is part of a broader strategy to diversify into assets like gold, signaling a gradual shift away from the dollar as the central banks’ preferred safe haven.
A Point of No Return?
Moody’s downgrade goes beyond equity and bond prices—it exposes a long-term dynamic: over the past two decades, debt-funded public spending has driven up prices in housing, education, and healthcare. Meanwhile, many citizens feel increasingly squeezed, seeing their purchasing power erode despite nominal economic growth.
Technicians point to a possible sequence: weakness and correction in May, a rebound in June, formation of a double bottom, and recovery before the third-quarter earnings season. Yet as with any “grey swan”—an event of detectable but not guaranteed impact—the outcome hinges on the trajectory of confidence, Washington’s fiscal choices, and the response of major debt holders.
Conclusion
Moody’s downgrade is far more than a data point; it is a stark warning about the limits of debt-driven growth. In a world hungry for financial security, the dollar and U.S. Treasuries have lost their unquestioned safe-haven status and now face intense scrutiny. We are entering a new era defined by investor selectivity, market volatility, and the imperative for stricter budgetary discipline. The age of cheap money may be drawing to a close—and with it, an unprecedented challenge for the world’s leading economy.
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The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.
A Warning Bell for the Financial System
Friday, May 16, 2025, may go down as the moment global confidence in U.S. sovereign debt turned on its head. In an unprecedented move after months of debate in Washington and on Wall Street, Moody’s Ratings downgraded the U.S. credit rating from Aaa to Aa1, stripping the Treasury of its last “Triple A” hallmark. According to the agency, runaway federal borrowing has reached unsustainable levels, and interest costs could drive the public deficit up to 9% of GDP over the next decade.
The news set off alarms in seconds. In after-hours trading, the SPY—the ETF mirroring the S&P 500—saw all its gains vanish in an instant, while the yield on the 30-year Treasury spiked to nearly 5%, a threshold that in past crises has rapped on the doors of both the White House and Congress.
Echoes of 2011
Inevitably, minds returned to August 2011, when Standard & Poor’s slashed the U.S. rating. Then, the S&P 500 plunged 10%, and the long-bond fund TLT rallied by a similar margin. Although today’s geopolitical and economic backdrop—marked by renewed tensions and a post-pandemic realignment—is different, that episode offers a stark reminder of how quickly faith in the U.S. Treasury can evaporate.
Vulnerability Factors
Fiscal weakness is compounded by rampant retail optimism. Individual investors have purchased U.S. equities for 21 consecutive weeks—the longest streak on record, far surpassing the previous high in 2022. While this buying spree signals confidence, it also carries the risk of a sharp correction if faith in the government’s solvency falters, potentially triggering systemic fallout.
Adding to the strain, China drastically cut its Treasury holdings in March, relinquishing its spot as the second-largest creditor to the United Kingdom. More than a mere portfolio tweak, this move is part of a broader strategy to diversify into assets like gold, signaling a gradual shift away from the dollar as the central banks’ preferred safe haven.
A Point of No Return?
Moody’s downgrade goes beyond equity and bond prices—it exposes a long-term dynamic: over the past two decades, debt-funded public spending has driven up prices in housing, education, and healthcare. Meanwhile, many citizens feel increasingly squeezed, seeing their purchasing power erode despite nominal economic growth.
Technicians point to a possible sequence: weakness and correction in May, a rebound in June, formation of a double bottom, and recovery before the third-quarter earnings season. Yet as with any “grey swan”—an event of detectable but not guaranteed impact—the outcome hinges on the trajectory of confidence, Washington’s fiscal choices, and the response of major debt holders.
Conclusion
Moody’s downgrade is far more than a data point; it is a stark warning about the limits of debt-driven growth. In a world hungry for financial security, the dollar and U.S. Treasuries have lost their unquestioned safe-haven status and now face intense scrutiny. We are entering a new era defined by investor selectivity, market volatility, and the imperative for stricter budgetary discipline. The age of cheap money may be drawing to a close—and with it, an unprecedented challenge for the world’s leading economy.
*******************************************************************************************
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.
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The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.