Moody’s recent decision to downgrade the U.S. credit rating for the first time in history has reignited concerns on Wall Street and beyond, as investors reassess the reliability of government debt. The credit rating agency cut the country’s long-standing triple-A rating by one notch last week, citing rising federal debt and mounting interest costs—factors that could make borrowing money more expensive and pressure an already strained stock market. 

With this move, all three major credit rating agencies have now downgraded the United States from their highest rating: Standard & Poor’s did so in 2011, Fitch followed in 2023 and now Moody’s in 2025.

The move rattled bond markets, sending long-term Treasury yields above key thresholds and raising alarms about potential fallout for consumer loans, including mortgages and credit cards. 

Nathalie Moyen

To break down what Moody’s downgrade means, CU Boulder Today sat down with Nathalie Moyen, a finance professor at the Leeds School of Business and the W.W. Reynolds Capital Markets Program Chair. In this role, she supports the World of Business course for first-year students, which explores the role of business in society.

What does it mean when a country like the U.S. gets a Moody’s downgrade, and why is this significant?

Moody’s evaluates publicly available information about the U.S. government's financial position and offers its opinion on the country’s ability to repay its debt. Because Moody’s bases its assessments on existing data, its downgrade on May 16 did not introduce any fundamentally new information. However, many investors rely on credit rating agencies to interpret complex financial details, so the downgrade was significant to them.

What made this downgrade particularly shocking is that Moody’s had consistently rated U.S. debt as essentially risk-free since it first issued a rating in 1917. The U.S. maintained that top rating even through the Great Depression, World War II and the Great Recession in 2008.

What’s in a downgrade?

Imagine a high school graduate who leaves their job to attend the University of Colorado. While in school, their income drops and their personal credit score may fall. As educators, we view this as a worthwhile investment. Once the student graduates, they should be better off and their credit rating is likely to surge above previous levels.

The same principle applies to countries. The debt the U.S. accumulated to finance World War II could have warranted a downgrade at the time, especially since the outcome of the war was uncertain. But Moody’s did not downgrade it. Today’s rising U.S. debt levels don’t stem from such extraordinary circumstances, yet financial markets now only recognize the possibility that the U.S. may eventually struggle to meet its debt obligations.

How does a downgrade like this impact everyday Americans—for example, mortgage rates, car loans or credit card interest?

The downgrade is a reflection of higher borrowing costs. U.S. Treasury yields, used as benchmarks for many consumer borrowing rates, have been rising steadily since 2020. As a result, most Americans have already experienced higher interest rates on new mortgages, auto loans and credit card balances.

These rising rates embed growing concerns about U.S. fiscal risk and have also affected retirement savings through market volatility. Higher financing costs may lead businesses to delay hiring or investment, slowing economic growth.

Meanwhile, the U.S. government now faces higher interest payments on its own debt. Eventually, that pressure will likely lead to higher taxes or cuts in government spending, both of which will be felt by everyday Americans.

We saw the 30-year Treasury yield briefly top 5%. Why does that matter, and what does it tell us about investor sentiment right now?

One of the most fascinating aspects of financial markets is that they reflect collective expectations about the future. Yields on the 30-year Treasury debt incorporate all currently available information and beliefs about what lies ahead. While our common law system is grounded in precedent, financial markets are inherently forward-looking. Together, these legal and financial systems help stabilize our political institutions by offering both structure and foresight.

Because markets aggregate future expectations, a loss of confidence in the economy can become a self-fulfilling prophecy. If investors and businesses expect negative outcomes, they may delay investment and innovation, actions that can themselves trigger or worsen the downturn they feared in the first place. The increase in Treasury yields signals rising concerns about future inflation, debt sustainability and policy uncertainty, all of which point to a growing unease.

Moody’s cited long-term fiscal challenges, rising interest costs and political gridlock. How should we interpret this decision and the concerns behind it?

These concerns are real and warrant attention, but it's important to step back and take a broader perspective. In the early 1980s, the 30-year Treasury yield remained above 10% for several years. Since then, borrowing costs have generally trended downward, giving rise to the “Great Moderation,” a period marked by lower inflation, milder recessions and reduced market volatility.

As recently as 2020, the 30-year Treasury yield was below 2%. Today, while it has climbed, it is hovering around 5%. In historical context, the U.S. has weathered far more turbulent conditions. That history should give us reason for cautious optimism. We’ve faced serious fiscal and economic challenges before and emerged stronger. The key now is to steer the economy toward more stable ground.

With the U.S. now rated just below triple-A by all major agencies, are Treasurys still considered a 'safe haven' investment globally? 

What makes the U.S. a “safe haven” isn’t just the credit rating of the federal government, whether it’s Aaa or one notch below. The safety comes from the strength of our legal and financial institutions: the rule of law, an independent central bank, the deep, liquid financial markets and the continued role of the U.S. dollar as the world’s reserve currency. Moody’s downgrade is a stark reminder that none of this should be taken for granted.

How do Trump-era policies—like renewed tariffs and proposed tax cuts—factor into Moody’s downgrade and the broader fiscal picture?

Moody’s downgrade came on Friday, May 16, as Congress was debating the “One Big Beautiful Bill Act.” It’s tempting to view that moment as the final straw that broke the camel’s back, but the reality is that the downgrade was a long time coming.

Standard & Poor’s removed its top rating for U.S. Treasurys back in 2011 during the debt ceiling standoff between Republicans and Democrats. Fitch downgraded its rating in 2023. Now, all three major credit agencies agree: There is a non-zero probability that the U.S. may eventually find it difficult to repay its debt.

Some argue that as long as the U.S. controls its own currency, it can’t default in the traditional sense. Does that lessen the weight of these credit downgrades?

Yes, the Federal Reserve could step in and print money to prevent a technical default by the U.S. government. Doing so would inject more dollars into the system, fueling inflation and weakening the U.S. dollar relative to other currencies. As global investors see the value of their U.S. holdings decline, they would be less inclined to buy U.S. government debt. In turn, the U.S. government would need to offer even higher interest rates to persuade these investors to continue lending money.

So while printing money might avoid a traditional default, it leads to a downward spiral. It may not be default in the classic sense, but it’s still a losing strategy.