TREASURIES-Longer-dated bonds sell off after Moody's rating cut
Longer-dated U.S. Treasury yields rose after Moody's downgraded the country's credit rating from "Aaa" to "Aa1" due to fiscal deficits and rising interest costs. This downgrade follows similar actions by Fitch and S&P Global. The yield on 30-year Treasury notes jumped to 5%, reflecting shaken investor confidence amid concerns over President Trump's tax-cut bill potentially adding $3-$5 trillion to the national debt. Analysts warn of a "Triple Threat" scenario affecting the dollar, as rising yields and falling equities could undermine market stability.
SINGAPORE, May 19 (Reuters) - Longer-dated U.S. Treasury yields rose on Monday, after Moody's became the latest among major credit ratings agencies to cut its ratings on the country's debt, further eroding confidence in dollar markets.
Moody's Investors Service downgraded the credit rating for the world's largest economy by a notch to "Aa1" from "Aaa" on Friday, citing large fiscal deficits and growing interest costs. The agency's move was not much of a surprise to investors, given peers Fitch and S&P Global had downgraded the United States much earlier.
Markets also took stock of U.S. President Donald Trump's sweeping tax-cut bill that won approval from a key congressional committee on Sunday to advance toward possible passage in the House of Representatives later this week.
Nonpartisan analysts say the bill would potentially add $3 trillion to $5 trillion to the nation's ballooning $36.2 trillion debt pile over the next decade.
The yield on 30-year Treasury notes US30YT=RR jumped nearly 10 basis points and was last at 5%, close to its highs for the year.
"Confidence has been shaken (in U.S. markets) and it is going to take some time for that to return and that's going to leave participants jumping at shadows a little bit," said Tony Sycamore, market analyst at IG.
"The reaction has been getting back to concerning levels for the 30-year yield and certainly that long end is showing some signs of distress," Sycamore said.
Investor confidence in U.S. financial assets has been steadily eroding this year as Trump's erratic and aggressive trade policies stoke recession fears and shake longstanding faith in the dollar.
Those concerns have also weighed on U.S. stocks and bonds, and driven 10-year yields up 50 basis points in around six weeks.
Yields on 10-year Treasuries US10YT=RR were up about 8 basis points and last at 4.5%, while shorter-dated 2-year notes US2YT=RR were broadly muted.
The spike in yields weighed on Wall Street's main stock index futures, with those tracking the benchmark S&P 500 EScv1 and the tech-heavy Nasdaq NQcv1 dropping more than 1% each. The greenback =USD was flat.
HSBC analysts said the dollar's future largely hinges on how Treasuries react to the fiscal situation and ongoing budget debate.
"The best outcome for the U.S. dollar might be stability in the fiscal backdrop, with market-friendly tax cuts paid for through targeted spending cuts," they wrote.
They warned of a "Triple Threat" scenario, where U.S. yields rise, equities fall and the dollar weakens.
Analysts at Mirabaud Equity Research said the downgrade was not a serious technical development as most banks, clearing houses and money market funds still treat Treasuries as if they were triple-A rated and capital requirements or margin calls will not change.
"But symbolically? It's an earthquake. When the last bastion of credibility falls, it's not the financial mechanism that fails...it's confidence. And if the markets pretend to ignore it today, they could pay a higher price tomorrow, because the dynamics of the revaluation of sovereign risk never warn you when they get out of control."
