U.S. Credit Downgrade Reflects Growing Investor Angst But Is Unlikely To Test CRE

Moody’s became the latest — and last — major ratings agency to downgrade the United States’ credit rating Friday. 

It was another in a string of signals that investors are losing confidence in U.S. fiscal health after decades of deficit spending, and it comes as Republicans battle in Congress over a spending bill that is only expected to add to the national debt.  

A side effect of the macroeconomic malaise could be rising yields on U.S. Treasury bonds as investors continue repricing the risk premium. Rising yields mean higher borrowing costs, which have already been sucking oxygen from commercial real estate markets since the Federal Reserve began raising interest rates to combat inflation in 2022.

Moody’s decision is more the result of economic trends than the cause of it, but the ratings downgrade reflects a souring investor sentiment as the outlines of President Donald Trump’s economic policy come into focus. 

“It was coming, people just weren’t certain when it would come,” Trepp Chief Economist Rachel Szymanski said of the downgrade. “Fiscal stress is building, and that kind of realization is just entering the system’s long-range view now. This is more of a symbolic recognition of what people already were thinking.” 

Moody’s cited the high and growing national debt and associated interest payments as the primary reason for cutting the U.S. credit rating to Aa1 from Aaa. The agency said the budget being pushed through Congress by Trump and congressional Republicans was likely to add to the deficit.

Fitch Ratings lowered its U.S. credit outlook in August 2023, while S&P Global has had U.S. debt a step below the top rung since 2011. The move from Moody’s came as markets closed Friday, and the yield for 10- and 30-year Treasury notes both ticked up Monday. 

Treasury rates reflect broad unease about the long-term health of the American economy that investors have already priced into their bets. Yields are unlikely to rise rapidly unless there’s a surprise to the economic system, but they’re likely to continue on a slow upward trajectory, Szymanski said. 

“If we have some sort of big shock — like some geopolitical shock or some currency shock — that primes things for a more downside scenario. But right now, we're just heading into a slow erosion of confidence,” she said.

Brokerage executives said during first-quarter earnings calls in recent weeks that strong capital markets activity at the start of the year was buffeted by profound uncertainty injected into markets by Trump’s on-again, off-again trade war proclamations. 

The brokerage leaders nonetheless remained optimistic that the cloudy outlook would clear in the coming months, helping keep a nascent capital markets recovery on track. 

“​​What we're not witnessing is a freeze in decision-making, and that's in large part why we see our Q2 numbers and, frankly, our 2025 performance staying intact,” Cushman & Wakefield CEO Michelle MacKay said on the firm’s earnings call on April 29.

CBRE Chief Financial Officer Emma Giamartino said on her firm’s earnings call that she expected deals would continue to close so long as the yield on 10-year Treasury bonds remained below 5%. It was up less than 2 basis points Monday to 4.457%.

The credit downgrade shifted Moody’s ratings outlook from negative to stable, with risks more appropriately balanced for its new ratings tranche. Moody’s analysts said policy uncertainty was being partially offset by confidence in the Fed’s monetary policy. 

The size, resilience and dynamism of the American economy helps bolster the stable outlook, and the U.S. continues to enjoy credit benefits from the dollar's position as the global reserve currency.

“The downgrade isn't a disruption in itself. It's more of a signal of fiscal stress,” Szymanski said. “The safe-haven status of the U.S. dollar is still holding, but beneath it, there's growing discomfort about how long that story can last without a course correction.” 

Moody’s analysts said the extension of the tax reforms in the Tax Cuts and Jobs Act of 2017 that are winding their way through Congress would add an estimated $4T to the federal deficit over the next decade, without including the interest payments that would only further balloon the costs. 

“Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat,” Moody’s analysts wrote in their rationale for the downgrade. “In turn, persistent, large fiscal deficits will drive the government's debt and interest burden higher. The US' fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”