This morning, Moody's warned that U.S. fiscal strength has "deteriorated further" since they assigned a "negative outlook" on the U.S. credit rating back in 2023.
What does that mean?
They define a negative outlook as a signal of increased risk of a rating downgrade over the next one to two years. That puts us in that time window. And with that, this note today from Moody's looks like a setup for a downgrade.
And it comes as Congress is nearing a deal to raise the debt ceiling and continue Trump tax cuts. So, it's fair to assume that Moody's is telegraphing its move here.
That would follow the S&P downgrade back in 2011, and the Fitch downgrade in 2023.
Keep in mind, the U.S. administration is actually expressing the desire and articulating ideas to balance the budget, reduce interest costs and grow out of the debt.
On the other hand, in Europe they're dealing with fiscal fragility by adding more debt (massive debt). They want to explicitly rip up fiscal discipline rules, relax budget deficit limits and spend over a trillion euros (including euro zone and German commitments) to "rearm" Europe.
And Germany, the most rigid fiscal conservative in the euro zone, and the economic engine of Europe is already running the highest debt ratio among Fitch triple-A rated sovereigns.
With the above in mind, we'll hear from the Chancellor of the Exchequer tomorrow in the UK.
Rachel Reeves is due to deliver an annual statement on the UK's economic situation/outlook and the government's fiscal policy and spending plans.
The UK economy is weak and getting weaker, and the fiscal situation is fragile (with debt service and deficit constraints). And Reeves has very little ammunition to right the ship.
That makes the UK bond market a spot to watch tomorrow.
The 10-year gilt is already trading at a higher yield than it was in late 2022, when the Bank of England had to intervene (buy UK bonds/push yields down) to prevent a financial meltdown. And that spike in yields was surrounding the Liz Truss budget plan.
So, the vulnerabilities of global sovereign debt seem to be bubbling up. And that aligns with the discussions we've had on both the European Central Bank and the Fed in recent weeks — likely, more QE and a new wave of debt monetization to come.