Moody’s Finally Downgrades the U.S. Credit Rating

Recently, Moody’s was the last of the major credit rating agencies, and there are three of them, to downgrade the United States’ credit rating.

Now, we’re going to talk about:

1. What does that actually mean?

2. How can that really impact your mortgage rates?

What Does It Actually Mean?

When you downgrade a credit rating, think of it kind of like, in the personal world, your credit score or credit rating.

Effectively, the last major credit rating agency finally said:

“Hey, the United States… it’s like you went from a mid-800 score to maybe 799. Now you’re in the high 700s.”

So, if you kind of pin the two side-by-side, that’s the idea.

Ratings for sovereign nations go from AAA (a perfect rating) to AA1—which means you’re one step below a perfect credit rating.

Moody’s had held the AAA rating the longest. Back in 1919, we believe, is when they originally gave the U.S. its AAA rating. And now they’ve finally downgraded it—the last holdout of the three major agencies to do so.

The other two had already downgraded the U.S. in the past. It happened back in 2011 or 2009, when we actually saw a downgrade. It later came back up… and then back down again. But for Moody’s, this is the first time they’ve moved the U.S. from AAA to AA1.

How Does This Impact Mortgage Rates?

So how does this actually impact mortgage rates—or just the general creditworthiness of the United States?

By downgrading the credit rating, what that means—putting on my economics hat—is that now the U.S. may have to pay more to borrow.

Think of it again in personal terms: when your credit score goes down, it generally means you pay higher interest rates when borrowing for things like cars, houses, etc.

At a national level, downgrading from AAA to AA1 means that if the U.S. wants to borrow money (usually in the form of Treasury bonds), it might have to offer higher interest rates to attract lenders.

Now, some folks reacted by saying:

“Oh my gosh, it’s going to increase rates dramatically. Treasury yields are going to go way up.”

But remember—Moody’s was the last of the agencies to do this. The other two had already downgraded, so much of that risk was already factored in.

Why Did Moody’s Finally Downgrade?

So why did Moody’s wait so long and finally act?

It was due to recent fiscal uncertainty and concerns over monetary policy in Congress. That gave Moody’s the reason to say:

“Hey, we’re going to cut this back.”

Their wording was effectively that Congress is struggling to maintain a long-term balanced budget, and that’s a risk to the future repayment of U.S. debt. So they decided to lower the rating.

Think of it again like this: someone is rating your personal credit and says:

“Okay, right now you’re making some poor financial decisions, and your future budget planning doesn’t look solid. We’re going to lower your score a bit.”

Which means: you have to pay a little more, because there’s a little more uncertainty about your future.

How Does That Affect You?

Tying this back to what we deal with all the time—mortgages—this generally means we could see higher interest rates on mortgage loans.

In fact, right after the announcement from Moody’s, rates did rise a bit.

Now, it wasn’t as extreme as it would have been if all three agencies downgraded at once, but since the other two had already acted, the market had partially priced this in.

Still, it had an impact.

The Bottom Line

Now you understand a bit more about how credit agency ratings affect the U.S.’s ability to borrow—and how that translates to mortgage rates going up.

Effectively, all the agencies are telling the world:

“We see a bit more uncertainty in the U.S.’s ability to repay its debt.”

So global lenders say:

“Okay, cool. We’ll still lend you money—it’s still a high rating—but we’re going to charge a little more for the risk.”

From AAA to AA1 is still a very strong rating. But it’s kind of like going from an 800 credit score to 790 or 799. Still very good—just not quite as excellent.

My name’s Evan Kaufman.
Hope this helped explain things.
Take care.