U.S. debt downgraded by Moody's as yields rise to alarming levels

In the United States on May 21, 2025, the financial landscape shifted significantly as concerns about the fiscal deficit escalated. The 30-year Treasury bond yield surged back above 5%, while the 10-year Treasury note yield exceeded 4.5%. This rise in yields has caused apprehension among investors, especially as it follows a substantial rally in the stock market over the previous six weeks. The S&P 500 index has increased more than 22% since reaching an intraday low on April 7, highlighting an intense recovery phase that now faces headwinds from rising rates. Amid these developments, Moody's became the final major credit rating agency to downgrade the nation’s debt rating, underscoring intensified concerns regarding the U.S. fiscal position. Investors are becoming increasingly worried, especially as the Republican Party is working on passing a budget bill that has the potential to exacerbate the fiscal deficit. Such legislative actions raise alarms about the economy's sustainability and may lead to more significant alterations in investment strategies. The historical analysis provided by Raymond James indicates that the S&P 500 has struggled to maintain its performance when the 10-year Treasury yield rises above crucial levels. Since 2021, it has been noted that average annual returns for the S&P 500 are just 1% when yields are above 4.5%. This decline in performance becomes more profound with incremental increases in yields, with potential losses of up to 35.5% per annum once rates exceed 4.7%. Analyst John Davi from Astoria Portfolio Advisors expressed concern over the long-term consequences of unchecked deficits, suggesting that while modeling daily fluctuations is complex, diversifying into gold, real assets, and alternative investments is becoming increasingly practical. The rise in Treasury yields had an immediate impact on the stock futures markets, with S&P 500 futures and Nasdaq-100 contracts dropping by 0.7%, while Dow Jones Industrial Average futures fell by 0.9%. This downward trend in equity futures further emphasized the market's reaction to escalating yields. Additionally, UnitedHealth faced a downgrade by HSBC, projecting a significant downside ahead, which contributed to a drop in its share price of more than 6%. Thus, the current financial climate in the U.S. presents a scenario of heightened caution among investors, who may seek refuge amid forecasts of reduced stock market performances correlating with rising Treasury yields.