Amsterdam, November 13 (Reuters) – U.S. Treasury yields experienced a modest uptick on Monday, displaying a relatively muted response to Moody’s decision to downgrade its outlook on the U.S. credit rating.
Moody’s, in a late Friday announcement, adjusted its outlook on the U.S. AAA credit rating from “stable” to “negative,” citing substantial fiscal deficits and a decrease in debt affordability.
This development follows a previous sovereign rating downgrade by Fitch over the summer, which occurred amid prolonged political uncertainties surrounding the U.S. debt ceiling. With the Fitch downgrade, the United States lost its pristine AAA ratings from two out of the three major rating agencies. Moody’s negative outlook now raises the possibility that the world’s largest economy may lose its last remaining AAA rating.
On Monday in London, Treasury yields saw marginal increases, and analysts anticipate limited impact, considering previous downgrades of the U.S. rating. The benchmark 10-year Treasury yield rose approximately one basis point to 4.64% by 0934 GMT.
Two-year yields remained unchanged, while 30-year yields also saw a slight upward movement.
Jim Reid, a strategist at Deutsche Bank, noted, “S&P and Fitch ratings are already a notch lower at AA+, so the Moody’s move may be seen as a step towards catching up to the other rating agencies. However, if it did lose its last AAA rating, that would be highly symbolic.”
Investor attention shifted to U.S. inflation data scheduled for release on Tuesday. A Reuters poll anticipates a 0.1% monthly increase in headline inflation for October, compared to 0.4% in September. Core inflation, excluding volatile food and energy prices, is expected to remain unchanged at 0.3% monthly and 4.1% annually.
“The key data release this week will be tomorrow’s U.S. CPI, which could disappoint expectations for an ongoing swift decline in inflation,” remarked Rainer Guntermann, rates strategist at Commerzbank.
Market expectations for rate cuts have eased following statements from Federal Reserve Chair Jerome Powell, who expressed uncertainty last week about interest rates being sufficiently high to combat inflation. Traders are now pricing in the first Fed cut in June and anticipate three cuts by the end of 2024, adjusting their expectations based on Powell’s remarks. Previously, there were heightened rate cut bets, with a high probability of four 25-basis-point Fed rate cuts expected in 2024, possibly commencing in May.
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