The ratings hit means Republican fiscal hawks are likely to get more of a say as the bill heads to the House floor and eventually the Senate.
“The big unknown is when it all tips over,” Reid wrote in a separate note. “Our view is that Liberation Day has likely brought that reckoning forward. The U.S.’s exorbitant privilege—its ability to borrow well below fair value—is gradually eroding.”
The effect of a credit downgrade on American debt, however, has not always been straightforward.
In 2011, an 11th-hour agreement averted such a scenario, but Wall Street had to reckon with a new reality.
“It was definitely Earth-shattering for a lot of investors,” Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, told Fortune, “because no investor had ever considered U.S. Treasury debt as potentially risky in the form of non-payment.”
In the aftermath of the crisis, however, bonds rallied amid a stock market sell-off in a so-called “flight to quality.”
“People bought U.S. Treasuries as the risk-free asset because of uncertainty about Treasuries as the risk-free asset,” Goldberg said. “That sounds circular and ironic and crazy, but that’s exactly what happened. But you also had very wild price action. You had rates moving 30, 40, 50 basis points per day.”
Rather than driven by the debt ceiling, this cut is centered on the scale of U.S. borrowing. Even as deficits skyrocket, America won’t default on its debt, Jay Hatfield, the CEO of Infrastructure Capital Advisors, told Fortune. The government can always print more money to pay its bills, but that poses huge risks of higher inflation and a weaker dollar, decreasing the value of payments to bondholders in real terms.
“I think what Moody’s is doing is more an investment rating than a default-risk downgrade,” said Hatfield, who manages ETFs and a series of hedge funds.
“Said differently, for those who care about the value of their money,” the Bridgewater founder wrote, “the risks for U.S. government debt are greater than the rating agencies are conveying.”
