After the markets closed on Friday, May 16, Moody’s cut the U.S. sovereign credit rating from Aaa to Aa1. In an April 25, 2025, Barchart article that addressed why U.S. government bonds were weak, I highlighted tariffs and the U.S. government debt level, concluding:

Trade deals between the U.S. and its leading partners worldwide, including China, Japan, the EU, Canada, Mexico, and others, could lift bonds as they would reduce inflationary pressures and fears. Meanwhile, a long-term standoff could send the long bonds lower and interest rates higher. The 107-04 support and 134-14 resistance are the critical technical levels in late April 2025.   

The nearby U.S. 30-year Treasury bond futures were at 115-26 on April 25 and moved lower following Moody’s credit rating cut. However, the long bond futures have not declined to levels challenging the critical technical support level. 

The long bond trend remains bearish

The U.S. long bond futures have made lower highs since 2020.

The monthly U.S. 30-year Treasury bond futures have been in a bearish trend since March 2020, falling to a 107-04 low in October 2023. While the long bond futures have not made a lower low, they have traded between 110-01 and 127-22 in 2024 and 2025 and were not far above the 110 level in June 2025. 

The Fed is not moving- No rate cuts yet in 2025

While inflation data has moved toward the Fed’s 2% target, the central bank has not reduced the short-term Fed Funds Rate in 2025, despite forecasts for two twenty-five basis point rate cuts this year. The Fed is concerned about tariff impacts that could cause elevated inflation. High debt levels and uncertainty because of tariffs have caused the rate cut pause after the Fed Funds Rate fell 1% in 2024 to the current midpoint of 4.375%.

Meanwhile, the Fed controls the short-term Fed Funds Rate while the bond market is responsible for longer-term interest rates. The price action in the long bond futures shows that long-term rates remain elevated in June 2025.  

Moody’s cited debt and interest expenses

On May 16, 2025, Moody’s, a leading rating agency, downgraded the United States’ credit rating from Aaa to Aa1. The downgrade is a commentary on the U.S. sovereign debt’s full faith and credit. A lower credit rating increases the interest rate buyers seek for long-term debt. U.S. debt levels caused Moody’s downgrade.

The chart shows that U.S. debt continues to increase at nearly $37 trillion. With the Fed Funds Rate at 4.375%, the debt increases by over $1.6 trillion annually, and higher long-term rates put additional upward pressure on the national debt. 

The administration calls the credit rating move “lagged”

U.S. Treasury Secretary Scott Bessent dismissed the Moody’s sovereign debt downgrade, saying:

First of all, I think that Moody’s is a lagging indicator, and I think that’s what everyone thinks of credit agencies. Larry Summers and I don’t agree on everything, but he’s said that when they downgraded the U.S. in 2011. So it’s a lagging indicator. 

Meanwhile, the long-term treasury bond futures moved lower after the May 16 downgrade. 

The daily chart shows that the September futures settled at 113-02 on May 16 before Moody’s downgrade and fell to a 109-20 low on May 22. The futures remain below the May 16 closing level in early June as the downgrade has weighed on the bond market. However, the bonds have not challenged the long-term critical technical support at the October 2023 107-04 low. 

Trade, inflation, debt, and legislation remain critical for the bond market’s path

The bond market’s path of least resistance and the Fed’s monetary policy path depends on three factors in June 2025. 

Tariffs on worldwide trading partners are inflationary, but trade deals over the coming weeks and months could relieve the bond market’s downward pressure. Tariffs are trade barriers that increase prices and could filter through to inflation data over the coming months. However, the administration argues that revenues from tariffs will boost the economy. Time will tell how and if the tariffs impact economic data. 

The U.S. debt level continues to increase. Even if receipts and expenditures are even, which is unlikely as spending exceeds revenues, the debt will rise by over $1.6 trillion per year at the current interest rate levels. The bottom line is that the debt remains a bearish noose around the bond market’s neck.

The administration’s economic legislation extends tax cuts and adds other initiatives it believes will increase economic activity. After passing the U.S. House of Representatives by the slimmest of margins, it now faces significant changes in the Senate. Failure to pass the President’s “big beautiful bill” could put additional pressure on the U.S. economy. 

The Fed is worried about stagflation, which is rising inflation and declining economic activity. The concern is that inflation requires a tighter monetary policy path while falling economic activity requires a looser one. The quandry has caused the Fed to remain stuck in neutral when it comes to rate hikes as the latest economic data points to inflation moving toward the 2% target. 

Moody’s reduced the U.S. sovereign credit rating because of debt concerns. Meanwhile, Republican opposition to the “big beautiful bill” in Congress and the Senate comes from members who believe increasing the debt is a tragic mistake. JP Morgan Chase’s Jamie Dimon told markets to expect a crack in the U.S. bond market, as he expects higher rates and lower bonds on the horizon. 

The bond market is a real-time barometer of the U.S. credit rating. Time and events will tell if the long bond futures fall below the 107-04 technical support, which would validate Moody’s credit downgrade and Jamie Dimon’s forecast.