Treasuries, Dollar Fall as Moody’s Sharpens Focus on US Debt

Long-dated Treasuries fell on Monday after Moody's Ratings downgraded the US' credit rating from Aaa to Aa1, citing concerns over the nation's fiscal outlook and ballooning debt.

The downgrade led to an increase in yields on 30-year and 10-year US Treasury bonds, as well as similar increases in German, Italian, French, and UK debt, amid growing worries over government spending globally.

While some analysts downplayed the impact of the downgrade, others saw it as adding to concerns over the US economy and potentially leading to a shift away from dollar-denominated assets. Libby Cantrill, PIMCO Head of US Policy, breaks down what this means for the dollar.

Washington lawmakers are risking a “fiscal disaster” if a recession hits as they plow on with their package of sweeping tax cuts, according to Guggenheim Securities Co-Chair Jim Millstein.

“What today is 6.4% of GDP as a deficit, a $2.4 trillion deficit, could easily expand to $4 trillion if we had a recession,” Millstein said in an interview on Bloomberg Television. The cost estimates of the current GOP package “assume consistent economic growth. So imagine we have a recession. In the last five or six recessions, the budget deficit actually blows out because tax revenues go down and spending increases.”

Two Federal Reserve officials, including New York Fed chief John Williams, suggested policymakers may not be ready to lower interest rates before September as they confront a murky economic outlook.

“It’s not going to be that in June we’re going to understand what’s happening here, or in July,” Williams said Monday at a conference organized by the Mortgage Bankers Association. “It’s going to be a process of collecting data, getting a better picture, and watching things as they develop.”

Atlanta Fed President Raphael Bostic struck a similar tone in an earlier interview on Monday, signaling an unwillingness to move rates for some time.

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