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A look at the day ahead in U.S. and global markets

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

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A sideswipe at the last remaining triple-A U.S. sovereign credit rating appears to have been batted away by bond investors so far – but the lingering risk of a government shutdown this week keeps a cloud over markets.

Moody’s, the credit ratings firm, on Friday lowered its outlook on U.S. government debt to “negative” from “stable” citing large fiscal deficits and a decline in debt affordability and dysfunction in congress.

It’s the last of the three major rating agencies to maintain a top rating for the U.S. Treasury as Fitch lowered its rating in August and S&P removed its AAA in 2011.

Moody’s analyst William Foster told Reuters on Friday the chance of a “significant policy response” to rectify the fiscal situation probably wouldn’t happen until 2025 “because of the reality of the political calendar next year.”

The U.S. Capitol dome is seen from the Russell Senate Office Building on Capitol Hill in Washington, U.S., April 19, 2023. REUTERS/Sarah Silbiger

And yet the clunky machinations of Congress and gridlock between the two main parties mean there’s still a chance government operations could be shut down as soon as Friday.

U.S. House of Representatives Speaker Mike Johnson unveiled a Republican stopgap spending measure on Saturday aimed at averting that, but it quickly ran into opposition from lawmakers on both sides.

All the more impressive then that Treasuries seem so calm first thing on Monday, with the 10-year Treasury yield hovering at about last week’s close at 4.62% – 3 basis points below Friday’s intraday high and still some 40bps below October’s peaks above 5%.

One one level, there’s some relief the rating was maintained despite the darker outlook. And on another level, there’s a mixed take on the implications of a shutdown – not least that it would dampen further economic activity in an already clearly slower fourth quarter.

That would keep the Federal Reserve at bay despite its warnings last week that another rate hike was still on the table.