Citi analysts warned that US officials have very limited policy space if Moody’s downgrade of the country’s credit rating triggers a sell-off in Treasury bonds. In a note to clients, they said there was “almost no” action that the Federal Reserve (Fed) or the Treasury Department could take if US bond yields surged sharply.
According to Citi, the Fed would only restart the easing cycle if the unemployment rate rose significantly, while the Treasury has little room to reduce the size of its bond issuance. Although US Treasury yields eased slightly on Monday after an initial surge, they remain elevated.
Moody’s cut the US credit rating one notch to “Aa1” from “Aaa”, arguing that the country’s debt levels and interest payments are now significantly higher than those of other countries with similar ratings. Moody’s also criticized the US administration and Congress for their continued failure to address the large annual fiscal deficit and rising interest burden.
While Citi said the downgrade would not have a major impact on its own, it could reignite concerns about foreign demand for U.S. assets. These concerns had already sparked bond sales in April following President Trump's retaliatory tariffs. However, recent data shows foreign demand for Treasury bonds remains strong, with little change after Fitch downgraded the rating in 2023.
