Moody's downgrades United States credit rating, citing growth in government debt

Moody's Ratings cut the United States' sovereign credit rating down a notch to Aa1 from the Aaa, the highest possible, citing the growing burden of financing the federal government's budget deficit and the rising cost of rolling over existing debt amid high interest rates.

"This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns," the ratings agency said in a statement.

The decision to lower the United States credit profile would be expected, at the margin, to lift the yield that investors demand in order to buy U.S. Treasury debt to reflect more risk, and could dampen sentiment toward owning U.S. assets, including stocks. That said, all the major credit rating agencies continue to give the United States their second-highest available rating.

The yield on the benchmark 10-year Treasury note climbed 3 basis points in after-hours trading, trading at 4.48%. The iShares 20+ Year Treasury Bond ETF fell about 1% in extended trading, while the SPDR S&P 500 ETF Trust fell 0.4%.

Moody's had been a holdout in keeping U.S. sovereign debt at the highest credit rating possible, and brings the 116-year-old agency into line with its rivals. Standard & Poor's downgraded the U.S. to AA+ from AAA in August 2011, and Fitch Ratings also cut the U.S. rating to AA+ from AAA, in August 2023.

"Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's analysts said in a statement. "We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration."

Massive deficit

The U.S. is running a massive budget deficit as interest costs for Treasury debt continued to rise due to a combination of higher rates and more principal debt to finance. The fiscal deficit in the year that began October 1 is already running at $1.05 trillion, 13% higher than a year ago. Revenue from tariffs helped shave some of the imbalance last month.

The Moody's downgrade came as the GOP-led House Budget Committee on Friday rejected a sweeping tax cut package as part of President Donald Trump's agenda, including extending tax cuts enacted in 2017.

Moody's officially rated U.S. bonds in 1993 for the first time, but had assigned a "country ceiling rating" of AAA on the U.S. since 1949.

— With additional reporting by CNBC's Christina Cheddar-Berk and Scott Schnipper