Introduction: US digests Moody’s credit rating downgrade
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
How did the US lose its triple-A credit rating? Gradually, then suddenly.
Moody’s dealt the death blow on Friday afternoon, announcing it was cutting its rating on US government debt to Aa1, one notch down from the gold-standard Aaa.
This is 14 years after S&P became the first major agency to downgrade the US, with Fitch following suit in 2023.
Moody’s cited the swelling US national debt – now $36trn – and growing interest costs, saying:
Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.
Treasury secretary Scott Bessent tried to brush aside the issue, telling CNN that he “does not put much credence in the Moody’s” downgrade.
We’ve inherited a 6.7% deficit-to-GDP, the highest outside war or recession.
Our focus is to grow the economy faster than the debt, that’s how we will stabilize debt-to-GDP. pic.twitter.com/yblwrunO9t
— Treasury Secretary Scott Bessent (@SecScottBessent) May 18, 2025
Bessent took a similar line to NBC, telling their Meet the Press program:
I think that Moody’s is a lagging indicator. I think that’s what everyone thinks of credit agencies. Larry Summers and I don’t agree on everything, but he said that’s when they downgraded the U.S. in 2011. So it’s a lagging indicator.
Investors may take the same view. After all, Moody’s is only reacting to information already available to the market.
On the other hand…. US borrowing costs have been rising in recent years, adding to fiscal pressures. Moody’s downgrade could be an excuse for some bond-holders to sell, pushing down prices and raising yields (the interest rate on Treasury bonds).
The timing of Moody’s move has prompted some eyebrow-raising, at a time when some Republican rebels in Congress had been opposing Donald Trump’s ‘big, beautiful bill’, fearing tax cuts will make the fiscal position even worse.
The agenda
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9.30am BST: S&P Global UK Consumer Sentiment Index
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10am BST: Eurozone inflation report for April (final reading)
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3pm BST: Conference Board Leading Economic Index of the US economy
Key events
The US bond market is sending “warning signals” reports, Ed Monk, associate director at Fidelity International.
With the US 30-year bond yield now up to 5.03%, an 18-month high, Monk says:
“The world’s two most important financial markets are, not for the first time, shouting two different messages.
“America’s principal stock market index, the S&P 500, is within a whisker of 6000, not far from its record closing level of 6144 reached on 19 February. It is saying, in effect, that the tariff crisis is over, and we can all breathe a sigh of relief.
“The US bond market, by contrast, is signalling distress. It is telling the American government that if it wants to borrow for 30 years it will have to pay 5% a year for the privilege.
“While some of this elevated yield on American government bonds, or ‘treasuries’, may be down to the ‘flight from the dollar’ prompted by the recent trade environment, this spike in yields follows a downgrade by Moody’s, which removed the US’s AAA credit rating, citing over a decade of rising debt and interest costs. The US had held a Moody’s AAA rating since 1917.
“Economists worry that when a rise in yields coincides with increased borrowing, interest payments on the debt can grow significantly. The latest tax cuts are expected to widen the US budget deficit, as they are not matched by spending cuts.
“Some of the rise in yields is likely to due to the increased supply of government bonds as the US Treasury issues more of them to fund the tax cuts – more supply means a lower price, and bond yields and prices move in opposite directions. Some may also reflect concerns about inflation, as the tax cuts increase consumer spending power.
VIX jumps after Moody’s downgrades U.S. credit rating
Wall Street’s ‘fear index’ has jumped today, after Moody’s downgraded the US credit rating on Friday night.
The CBOE Volatility Index (VIX) has risen by 12.3% this morning to its highest level in over a week.
That suggests investors are more jittery, after the US was downgraded from Aaa to Aa1 (its second-highest rating).
Both the pound and the euro have gained a cent against the sliding US dollar today.
Sterling is now up 0.8% at $1.338, while the euro is 0.9% higher at $1.127.
While the dollar is suffering from that post-downgrade hangover, the euro and the pound could be benefitting from their new trade deal, which London insists will boost the economy:
Brad Bechtel of Jefferies says:
The UK on a roll these days with yet another trade agreement. First it was India and the UK and then the US and UK, and now we see something between the UK and EU.
Each of these seem to be frameworks rather than a full-blown official deal, but concession were made, hard decision were hashed out, and they have arrived at a relationship that both seem to be in line with. At the margin, all very positive for the UK on a longer term horizon. Not sure it will do much for the GBP or the UK economy in the here-and-now but longer term it will definitely be supportive.
Gwyn Topham
Ryanair has said air fares will head back up this summer after a year of lower fares saw the budget airline’s profits fall 16%.
Europe’s biggest airline carried just over 200 million passengers in 2024-25 with ticket prices down 7% to fill its planes, after a dispute halted bookings from some online agents, reducing full-year profits to €1.6bn (£1.4bn).
However, it expects fares to rise by about 5%-6% in 2025’s peak season, and Easter already brought a leap of 15% in the first quarter.
Trump tariffs force EU to cut 2025 eurozone growth forecast
The European Commission has slashed its growth forecasts for this year, due to the uncertainty caused by Donald Trump’s trade wars.
In its new spring forecasts, the Commission has cut its forecast for eurozone growth this year to just 0.9%, down from 1.3% forecast last November.
The wider EU is now forecast to grow by 1.1%, down from 1.5% forecast six months ago.
The EC says:
This represents a considerable downgrade compared to the Autumn 2024 Forecast, largely due to the impact of increased tariffs and the heightened uncertainty caused by the recent abrupt changes in US trade policy and the unpredictability of the tariffs’ final configuration.
Trade conflict is also forecast to pull down eurozone inflation. The EC now expects headline inflation to hit the 2% target by the middle of this year, earlier than expected, before dropping to 1.7% in 2026.
Among individual countries, the EC doesn’t expect Germany to grow at all this year, while France is only expected to expand by 0.6%.
The @EU_Commission‘s growth projections for 2025 (%):
🇲🇹4.1
🇩🇰3.6
🇮🇪3.4
🇵🇱3.3
🇭🇷3.2
🇨🇾3.0
🇱🇹2.8
🇪🇸2.6
🇬🇷2.3
🇧🇬2.0
🇸🇮2.0
🇨🇿1.9
🇵🇹1.8
🇱🇺1.7
🇸🇰1.5
🇷🇴1.4
🇳🇱1.3
🇪🇪1.1
🇪🇺1.1
🇸🇪1.1
🇫🇮1.0
🇧🇪0.8
🇭🇺0.8
🇮🇹0.7
🇫🇷0.6
🇱🇻0.5
🇩🇪0.0
🇦🇹-0.3— EU Economy & Finance (@ecfin) May 19, 2025
UK bonds are also falling today, amid a wider selloff in government debt.
This has pushed the yield, or interest rate, on 10-year gilts is up by 10 basis points to 5.485%, the highest since the middle of April – when US trade war fears were causing market ructions.
Market ‘very nervous’ as US borrowing costs rise
Other US government debt prices are also weakening this morning, pushing up the country’s cost of borrowing.
The yield, or interest rate, on 10-year Treasury bonds has risen by 10 basis points (0.1 percentage point) to 4.54%, tracking the rise in longer-dated 30-year Treasury yields.
Two-year Treasury bill yields are slightly higher.
George Saravelos, foreign exchange expert at Deutsche Bank, is concerned that US fiscal risks are rising sharply.
He tells cleints::
The key problem is that the market has over the last two months structurally re-assessed its willingness to fund US twin deficits. We demonstrated how America’s net external asset position is the best metric to measure fiscal space, and this is on a rapidly deteriorating path. To be sure, as Treasury Bessent argued over the weekend, the Moody’s rating agency downgrade is a lagging indicator of fiscal health. But the key problem for the US is that both the bond and currency markets have been insufficiently pricing in fiscal risks in the first place.
The US has an additional problem: whatever the Republican Congress decides to do with fiscal policy over the next few weeks, it will most likely be “locked in” for the remainder of the decade. The very difficult reconciliation process and the potential loss of a Republican majority in the mid-terms essentially leaves space for only one major fiscal event during the current Trump administration. Once this concludes, there will be very little that can be done to change the fiscal trajectory for the foreseeable future. This is different to many European countries which were able to pivot fiscal policy quickly (within days, during Lizz Truss’ premiership) in the event of market pressure.
The combination of diminished appetite to buy US assets and the rigidity of a US fiscal process that locks in very high deficits is what is making the market very nervous.
30-year US bond yields highest since November 2023
The selloff in US government bonds this morning has pushed long-dated borrowing costs to their highest level since late 2023.
The yield, or interest rate, on 30-year Treasury bonds has risen to 5.026%, up 13 basis points today, as investors digest Moody’s decision to downgrade the US from AAA on Friday night.
Yields rise as bond prices drop, so this indicates investors are seeking a higher return for holding US debt.
OUCH! US 30y yield rose to the highest level since Nov 2023 amid concerns over the nation’s debt after Moody’s downgraded the country’s Aaa rating. (BBG) pic.twitter.com/pZvygPLS4Q
— Holger Zschaepitz (@Schuldensuehner) May 19, 2025
George Vessey, lead FX & macro strategist at Convera, says the “sell America” trade back in focus after Moody’s US credit downgrade, and that rising bond yields reflect “growing Wall Street worries over the US bond market”.
UK household pessimism moderates in May
UK households have grown slightly less pessimistic about their financial prospects this month, according to the latest consumer sentiment index (CSI) from S&P Global.
The monthly survey found that household pessimism moderated this month, showing:
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CSI ticks higher, but remains firmly in negative territory amid persistent financial worries
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Households report improved job security
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More households anticipate rate cuts than those expecting a rise for the first time in three months
However, the survey also found that pessimism was centred in the public sector, with those working in the private sector anticipating an improvement in their financial situation.
Among the five income groups, the highest two brackets anticipate improved financial wellbeing over the coming 12 months. Households in the remaining lower three income tiers remain pessimistic, although their outlooks are less negative than in April.
Maryam Baluch, economist at S&P Global Market Intelligence, says:
“UK households remained resolutely downbeat in May, though the level of financial pessimism eased compared to April and has now even risen above the survey’s long-run average.
Encouragingly, households are feeling secure in their roles for the first time so far this year, perhaps in a sign that concerns over lay-offs relating to higher NI contributions and other wage-related measures reported in last year’s Budget have calmed, now that the higher rates have taken effect.
The main drag on sentiment instead came from consumer spending behaviour. Households were cautious with their spending due to limited cash availability, which hindered major purchases. Still, rising incomes eased some financial strain. In fact, households reported a softer deterioration in their current financial well-being and were less downbeat about their financial prospects.
A change in May is that, on balance, households adopted a dovish view on central bank policy. This marks the first time since February that more households expect interest rate cuts rather than an increase. It is hoped additional easing of monetary policy will stimulate household expenditure and alleviate difficulties in obtaining loans, with many big lenders already aligning their products with the latest policy adjustments.
UK households can look forward to cheaper energy bills this summer, analysts say.
Cornwall Insight have just released their final forecast for the next quarterly cap on energy bills – they predict the cap will drop by 7%, meaning a £129 per year reduction on average bills in July-September.
If Cornwall are right, a typical dual fuel household will be paying £1,720 per annum in July. This would represent a fall of £129 and 7% from the current price cap which is set at £1,849 per year for a typical consumer.
Jess Ralston, analyst at the Energy & Climate Intelligence Unit (ECIU), says:
“Predicted falls in energy bills simply cancel out recent rises, meaning the crisis is not over for bill payers who are still struggling with gas prices significantly above pre-crisis levels.
“Costs of oil and gas will always be volatile and can be manipulated by foreign actors like Putin, but every home that is insulated and has a heat pump installed reduces our gas demand and so exposure to these geopolitically vulnerable markets. Cutting insulation schemes would fly in the face of recommendations from multiple experts including the Energy Crisis Commission.
“With a new solar generation record set over the weekend, UK’s renewables are boosting our energy security and stabilising prices by reducing the amount of gas we need to import from abroad as the North Sea gas output continues its inevitable decline. Wholesale gas has cost the UK more than £140bn over the past few years.”
