SignalPlus Macro Analysis Special Edition: AA

2025-05-20 18:08:11

Collection

Source: IgniteRatings, X

Moody's has downgraded the long-term issuer and senior unsecured debt rating of the U.S. government from Aaa to Aa1, and changed the outlook from negative to stable.

This downgrade reflects the continuous rise in the proportion of U.S. government debt and interest payments over the past decade, which is significantly higher than that of other sovereign countries with the same rating.

---Moody's, May 16, 2025

Moody's downgrade of the U.S. long-term credit rating signifies that U.S. sovereign debt has been removed from the AAA category by all major rating agencies. This news was released just hours after the U.S. stock market closed last Friday, reportedly prompting the U.S. House Budget Committee to swiftly advance the "One, Big, Beautiful Bill" on Sunday night in an effort to minimize potential market shocks.

Setting aside political maneuvering and the theatrics of the budget bill, is credit rating still important? Readers may recall that Silicon Valley Bank (SVB) still held an "A" rating before its collapse, and more seasoned readers might not have forgotten the absurdly high ratings given to CDOs, CMOs, subprime mortgages, and Chinese real estate bonds.

To address this topic, we have organized the key points in a FAQ format:

When has the U.S. been downgraded in the past?

July 2011: S&P

August 2023: Fitch

Will there be immediate technical impacts?

For institutions restricted by ratings that cannot hold non-AAA bonds

Due to the scale and irreplaceability of U.S. Treasuries as an asset class, these institutions typically adjust their internal rules (as has been the case in the past).

Impact on centralized clearing

The way DTCC and CME handle Treasuries as collateral is based on duration and bond type discounts (haircuts), with less reliance on ratings.

Impact on money market funds

Short-duration allocations diminish the impact of credit ratings; in fact, even after past downgrades and debt ceiling disputes, demand for Treasury bills has shown little fluctuation.

Long-term reserve asset status of U.S. Treasuries

In reality, President Trump's tariff policies and global trade restructuring have had a more profound impact on global demand for U.S. Treasuries than any rating agency.

How did the market react in the past?

During the downgrade in 2011, it was the first downgrade and occurred during the initial "debt ceiling crisis," which shocked the market.
The stock market fell about 20% from July to August, but due to safe-haven hedging and the ongoing quantitative easing policy at the time, the 10-year Treasury yield actually dropped by 120 basis points (i.e., prices rose) after the downgrade.

In 2023, the downgrade occurred in August, right after the early summer debt ceiling crisis, while the U.S. Treasury was also recovering market liquidity by rebuilding the Treasury General Account and issuing a large amount of Treasuries. At that time, the SPX index fell about 10%, while Treasury yields continued to rise by about 50 basis points for the year. Although this credit rating downgrade may have accelerated the relative market trend, overall, it did not fundamentally change the market landscape.

Will this downgrade affect fiscal decision-making?

The House Budget Committee did indeed advance the budget bill on Sunday night, indicating a certain degree of intent to mitigate potential market shocks.
Will there be cuts to dollar spending or deficit control? While the downgrade may give more weight to the voices of fiscal hawks, it is unlikely to change the long-term trend of uncontrolled spending and concerns about unsustainable U.S. Treasury supply.
This will increase uncertainty regarding the final passage timing of the bill and whether there will be delays, and due to adverse effects on the budget, it may weaken the potential positive effects of tax cuts.

What might the market's response be?

In terms of stocks, given past experiences and the rapid rise in the market over the past few weeks without broad leadership, the short-term response in the stock market is likely to be an instinctive decline.
The bond market's trajectory is harder to predict and will depend on factors such as the extent of the decline in stock market risk appetite, the interplay between fiscal hawks and Trump, whether the Senate can smoothly pass the budget bill before the debt ceiling deadline, and whether this event will affect Trump's 90-day tariff truce agreement.
Overall, U.S. stocks, Treasuries, and the dollar may face negative risks.

What is the current positioning in the macro market?

Macro funds, systematic funds, and quantitative funds have mostly covered their short positions or reduced their exposure, and some have even turned bullish.

Last week, the market experienced a small "rally," with traders rushing to cover short positions, and the NYSE's Advance-Decline Line indicator reached a recent high.

How did last week's economic data perform?

Quite poorly for the bond market.
Despite recent easing of tariff policies, the University of Michigan's consumer sentiment index still saw a significant decline.
The overall index dropped to its lowest point since June 2022, nearly approaching the lowest level since the 1980s.
Long-term inflation expectations rose to the highest level since 1991 (4.6%).
One-year inflation expectations reached as high as 7.3%, the highest level since 1981.

Should the market worry about foreign capital selling?

Let's review the situation over the past few months.
Non-U.S. investors have stopped increasing their positions in U.S. equity funds since March and have become net sellers of bond funds, a trend that may continue in the short term.

However, in terms of actual impact, bank data shows that foreign investors held approximately $57 trillion in U.S. dollar assets in 2024, a significant increase from $2.2 trillion in 1990. Of this, about $17 trillion is in equity assets and $15 trillion in bonds.
In other words, foreign capital holds about 20% of the total supply of U.S. stocks and 30% of the total supply of U.S. bonds.
This is not a small amount and cannot be significantly sold off or reduced without affecting the entire capital market structure.
Furthermore, assets are dispersed among different foreign holders, and any rash action by one party will involve the reactions of other participants.
In terms of the stock market, the key remains the performance of corporate profits, which has been quite good so far. According to JPM data, the overall profits of the SPX index exceeded expectations by about 8% in the first quarter, with 70% of companies having reported earnings, of which 54% had revenues above expectations, and 70% had profits exceeding expectations, while the EPS growth of the Magnificent Seven reached as high as 28%, far ahead of the index.

In terms of holding structure (not considering ambiguous offshore structures like the Cayman Islands), the UK, Canada, and Japan are currently the top three holders of U.S. assets globally, and they are also close allies of the U.S. China ranks fourth, accounting for about 4%, significantly lower than the 8-9% of the earlier group.

According to movements over the past month, Japanese investors have indeed reduced their holdings in U.S. Treasuries but have simultaneously increased their positions in U.S. stocks, indicating more of an asset allocation adjustment rather than a true de-dollarization.
In short, it is unlikely that there will be a large-scale capital withdrawal or de-dollarization in the short term.

How has cryptocurrency performed?

Interestingly, despite gold prices falling about 7% from their peak, cryptocurrency prices have remained stable throughout the trend.
Unlike the previous months when gold prices and BTC rose in sync, BTC has continued to rise recently even as gold prices weakened, which is also reflected in ETF fund flows.
Gold ETFs have seen outflows, while BTC ETFs have experienced a slight increase in inflows, and CME's gold and BTC futures positions have shown similar trends.

Overall, as the macro market stabilizes and the dollar depreciates, this trade is reflected across most asset classes. We expect that the breakdown of correlations and relative value opportunities among these micro-assets will continue until the next significant geopolitical developments materialize.

Wishing everyone successful trading!