Market Outlook

June 1, 2025

Treasurys Lose A Notch Of Luster

During the Financial Crisis of 2011 and battle to raise the debt ceiling, the credit ratings agency S&P Global downgraded U.S. debt a notch to AA+ from AAA. (Fitch followed suit.) While that raised concerns in the credit market, some took solace in the fact that Moody’s didn’t downgrade its top rating, though it lowered its outlook to negative from stable.

Last month, however, Moody’s finally caught up to its peers. It did so against the backdrop of the House preparing to send the Senate a spending bill that many believe will increase the existing $36 trillion deficit by an additional $3 trillion over 10 years — less so because of higher spending, and more so owing to tax cuts.

To justify this tactic, House leaders argue that lower taxes will result in more investments which, in turn, will grow the economy. So while the deficit will rise, it will eventually shrink as a percent of GDP.

As was the case in 2011, last month, bond investors shrugged off Moody’s one notch downgrade (from Aaa to Aa1), though they had a very good reason: Treasurys are still one of the safest securities on the planet.

On the other hand, it’s the third such move in 14 years, while national indebtedness is only growing more intractable. Last year, for example, U.S. debt was nearly 125% of GDP. Back when both political parties were seriously considering a balanced budget amendment (let’s call that 2000), it was only about 35%! Nevertheless, it’s hardly helpful when a major business newspaper counsels its readers not to worry. After all, it argued, other major economies have experienced comparable downgrades, but have never defaulted.

While that may be true, there is no other country in the past 135 years whose economic wherewithal has been so vital to the rest of the world. That’s but one reason why the dollar is coveted by friends and foes alike. Notably, in the immediate aftermath of the 9/11 terrorist attacks, which saw U.S. banks and stock exchanges closed for four days, the dollar firmed slightly owing to its safe-haven stature in a dangerously changed world.

Having grown up when GM was the world’s largest automaker (now it’s fourth behind Toyota, Volkswagen and Hyundai) and Sears was the biggest retailer (I have a home that was ordered through its 1900 catalog!), we have all witnessed the pitfalls of size and complacency: "The bigger they are, the harder they fall."

At the risk of sounding alarmist, if the U.S. deficit continues to outpace economic growth, credit downgrades will persist, with various dire consequences:
1. The dollar will depreciate, making imports (and vacations abroad!) more expensive;
2. The federal government’s debt burden increases both as a result of additional borrowing and because of higher interest rate;
3. With almost 20% of the budget already earmarked just to pay interest on our debt, that allocation could rise to 35% in just 10 years. That leaves less money for defense and everything else;
4. It may still seem impossible, but an economically weakened U.S. is a gift to our adversaries. What would the world look like if China’s yuan becomes the world’s reserve currency?

More to the point, if Treasurys are no longer viewed as "risk-free" (and there are now three major rating agencies that say they aren’t), then I’d argue that they aren’t. Other Implications

Given my proclivity to see a glass half-empty, I allow for the fact that I may be overly concerned about the investment merits of U.S. government debt in coming years and, as an extension of that, what rising indebtedness will eventually do to the country’s overall health.

In the meantime, we may have already passed a threshold whereby we should start considering high-quality alternatives to Treasurys.

Based on data from Moody’s, S&P Global and Fitch, Investor’s Business Daily claims that there are now two companies whose balance sheets are even more robust than Uncle Sam’s: Johnson & Johnson and Microsoft.

In both cases, S&P Global and Fitch have assigned them the highest-possible rating of AAA (that’s one notch above Treasurys). In the case of Microsoft, its 10-year bond yields around 4.5% versus 4.4% for the lower-rated (AA+) 10-year Treasury. That said, there may be more: Apple and ExxonMobil are but two that come to mind. Then again, because countries can print money when they need it and companies cannot, large cash hordes that make corporate balance sheets appear healthier are inconsistent with their need to reinvest for growth or for share repurchases — which should increase shareholder value. In that way, government bonds have a credit edge.

In the this market, we still favor investment-grade credits over their government counterparts across most of the maturity spectrum. On paper, they’re considered a bit riskier, but that may continue to change. If so, the decision to favor credits over government bonds may, unfortunately, get easier.

— John Bonnanzio