Moody’s downgraded U.S. debt to Aa1 from Aaa. The primary reason was the rapid rise in federal government debt and the potentially higher yields the government may have to pay to refinance it.
The 30-year yield rose rapidly, increasing eight basis points to 5.02%. The last time the rate was this high was in November 2023.
Yahoo stated:
The latest downgrade was anticipated by many given it came when the US federal budget deficit is running near $2 trillion a year, or more than 6% of gross domestic product. The government is also on track to surpass record debt levels set after World War II, reaching 107% of GDP by 2029, the Congressional Budget Office warned in January.
Investors have a choice to make. A 5% yield is attractive. It will only drop if there is evidence that the federal government can reduce debt. The nonpartisan Committee for a Responsible Federal Budget forecasts that the new budget placed on the table by Republicans would raise the deficit by $3.3 trillion over the next decade.
The 5% payout is deemed “safe” because U.S. debt is still considered debt that will never default. However, there is some concern that if Congress does not agree on a debt ceiling before the end of the summer, a default may be possible. Treasury Secretary Scott Bessent recently wrote to House Speaker Mike Johnson that without a budget agreement, “there is reasonable probability that the federal government’s cash and extraordinary measure will be exhausted in August.”
Owning a 30-year bond with a 5% yield is a safe way to offset a choppy stock market. So far this year, they are probably right. In 2024 and 2023, they would have looked foolish.
Put some of these in your portfolio. The United States will not default, and not many stocks offer that level of yield.
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