Moody’s downgrade, US debt fears unsettle markets, reviving mini ‘sell America’ trade

Investors faced yet another bumpy start to the trading week with US assets coming under fresh pressure, although it’s mounting concern over American debt rather than tariffs generating volatility this time.

The downgrade risks reinforcing Wall Street’s growing worries over the US sovereign bond market as Capitol Hill debates even more unfunded tax cuts and the economy looks set to slow as President Donald Trump upends long-established commercial partnerships and renegotiate trade deals.

On Monday, 10-year Treasury yields were little changed around 4.48 per cent, having climbed in late Friday trading, and their 30-year equivalents edged up to 4.96 per cent. A 10-point increase in the 30-year yield would be enough to lift it above 5 per cent to the highest since November 2023 and closer to that year’s peak, when rates reached levels unseen since mid-2007.

“A Treasury downgrade is unsurprising amid unrelenting unfunded fiscal largesse that is only set to accelerate,” said Max Gokhman, deputy chief investment officer at Franklin Templeton Investment Solutions. “Debt servicing costs will continue creeping higher as large investors, both sovereign and institutional, start gradually swapping Treasuries for other safe haven assets. This, unfortunately, can create a dangerous bear steepener spiral for US yields, further downward pressure on the US dollar, and reduce the attractiveness of US equities.”