Credit-rating service Moody's said today that it is putting the U.S. government on review. Our government may see a downgrade from its Aaa bond rating because of the increasing possibility that the debt ceiling will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes.
Moody's ratings provide investors with a simple system of gradation by which relative creditworthiness of securities can be read. The Aaa rating is the highest rating and suggests that a government is very stable with the smallest degree of risk.
Moody's has also put on review for possible downgrade the Aaa ratings of financial institutions directly linked to the US government including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks.
If the debt limit is raised again and there is no default, the Aaa rating will stand.
The reaction? Treasurys did not react much; the 10-year is at 2.90%, just a little higher than where it was at close. The dollar is down and the euro stands at $1.42.
The risk of the U.S. government defaulting on its debt is minute. Still, the risk continues to increase and no longer de minimis. Despite this, a default would likely be short-lived and the expected loss to Treasury bond holders would be minimal or non-existent. Furthermore, the rating would be downgraded to the Aa range.