On May 16, Moody’s Ratings—an international agency that evaluates the creditworthiness of government and corporate bonds—downgraded U.S. Treasury bonds from their highest rating of Aaa to Aa1.
So, does this matter?
On the one hand, not really. Moody’s was the last of the three major credit agencies to act. Standard & Poor’s downgraded U.S. sovereign credit in 2011, yet the markets have soared since then. Fitch followed in 2023, and that barely made headlines. At the end of the day, the U.S. dollar remains the world’s reserve currency, and Treasurys are still widely considered among the safest investments available.
On the other hand, it does matter. The downgrade is a warning sign that the U.S. is on an unsustainable fiscal path, with national debt now exceeding $36 trillion. It comes just when global confidence in U.S. debt is wavering, and Congress is debating tax legislation that could further increase deficits.
What’s especially interesting is that three U.S. companies—Johnson & Johnson, Microsoft Corp., and Apple Inc.—currently hold perfect AAA credit ratings, while the U.S. government does not. Does that mean their debt is safer than U.S. Treasurys? It may suggest that, but the answer is more nuanced.
In theory, all else equal, the higher a bond’s interest rate, the greater the investment risk. Investors demand higher yields, known as a risk premium, to compensate for added uncertainty. Issuers with higher risk, such as companies with poor credit ratings or governments with fiscal challenges, must offer more attractive yields to draw investors. In essence, investors receive more compensation for bearing increased risk.
Take the 2029 U.S. Treasury bond, which yields 4.13 percent, versus a comparable Johnson & Johnson bond yielding 4.19 percent. The credit spread—the extra return for taking on corporate risk—is just 6 basis points. Even 15 years out, a 2040 Microsoft bond and a 2040 U.S. Treasury bond both yield 5.11 percent.
Credit spreads between Treasurys and highly rated corporate bonds have remained narrow for some time, raising a critical question, “Why assume additional credit risk for only a marginal increase in yield?” When the U.S. government is almost certain to repay its obligations, that slight premium may not justify the risk. Investors often aren’t adequately compensated for the possibility that a corporation could default.
Sure, a company like Microsoft will likely to be around in 15 years—but that’s not guaranteed. If a company fails, secured creditors (like banks with claims on assets) are paid first. Unsecured creditors, including bondholders and suppliers, come next. Stockholders typically are the last to receive repayment. We saw in 2008 that even “too big to fail” companies did, in fact, fail—and holders of their highly rated bonds didn’t always recover 100 percent of their investment.
While credit ratings and yield spreads provide practical insights, they don’t tell the full story. Moody’s downgrade may not trigger an immediate market upheaval, but it underscores growing fiscal pressures. For investors, it’s a reminder to look beyond ratings and yields and focus on the bigger picture—economic resilience, fiscal responsibility, and the true nature of risk. Sometimes, the safest investment isn’t the one with the highest return but the one most likely to endure.
If you have questions on your fixed-income investments, the experts at Henssler Financial will be glad to help:
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