Last Friday, Moody's Ratings cut the credit rating on the United States one notch down to Aa1, which is the second highest rating. The timing was strange given S&P Global Ratings removed its triple-A rating in 2011 and Fitch Ratings lowered it in 2023.
Moody's cited several reasons but this comes as Republicans debate a new budget bill that looks to increase the debt. For a short time, 30-year Treasury yield briefly jumped to over 5%.
Moody's lower of the credit rating of the United States is a largely symbolic move. The two other agencies did this years ago. But that doesn't mean there won't be repercussions.
Here's how it might affect you as an investor.
Higher Yields on Fixed Income
Higher yields sounds good but those yields are higher because prices fall, which is bad.
Existing fixed income investments will go down in value, which is bad if you need to sell them to access those funds. If you're simply holding them and collecting the payments, there isn't much to worry about.
As is the case whenever interest rates change, longer term notes will be affected more than shorter term ones. If you are concerned, shorten the average duration of your holdings to limit the exposure.
Maintain a Cash Buffer
As is the case during any major change, ensure you have a fully funded emergency fund and have it stored safely in a high yield savings account.
Evaluate the role bonds play in your cash flow needs because they may be affected by the ratings downgrade. As long as you have enough cash and don't need to sell your bonds, you will be in good shape.
Diversify Geographically
The Moody's downgrade is a signal that the United States government and its policies may not be as stable as once perceived. For investors, perception is a huge factor and the downgrade could introduce uncertainty. If you are too concentrated in the U.S., especially U.S. bonds, consider rebalancing to spread out the risk.
Think Long Term
When the S&P lowered the rating, it cause short term volatility in the stock market but did not have a long term impact. There may be short term effects, such as the 30-year Treasury yield creeping above 5%, but it's likely to have little long term impact if nothing else happens.
The United States economy is still strong, despite the threat of tariffs and a recession, and will continue to be strong long term.
Consider TIPS
Treasury Inflation-Protected Securities (TIPS) are a great fixed income vehicle for those concerned about inflation. They are sold in terms of 5, 10, and 30 years with fixed interest paid out every six months. When the TIPs matures, you get the principal back. In periods of higher than expected inflation, the principal will be updated upward and you'll be paid the higher amount. If inflation is lower, the principal may be lowered but you always get your original amount back.
