The Moody’s downgrade caught nearly everyone off guard on Friday afternoon. Most are dismissing the news as not a big deal, and perhaps it’s not. After all, the US has already had two prior downgrades. However, the timing is particularly sensitive, especially given the current negotiations around the tax bill. The key issue is that this downgrade comes at a moment when term premiums were already rising, potentially adding even more upward pressure.
At this point, the bond market is essentially in control—and more importantly, it has put the administration in a tight spot.
Scott Bessent had been trying unsuccessfully to lower the 10-year rate, and now the market clearly knows how to provoke a response from him and his team. With rates already back to levels seen before the pre-Liberation Day pause, one must assume the market will continue pushing rates higher until it gets a meaningful reaction from the administration.