After the close of trading on Friday, Moody’s downgraded the outlook on the U.S. sovereign rating to negative from stable. This move is not a huge surprise, given that the US has already been downgraded by S&P and Fitch, the latter in August. A lower outlook does not mean a downgrade, but a step in that direction.
As a result, the yield on the US 10-year Treasury note rose 3.8 basis points to 4.67%. They’ve been creeping in to push the dollar higher over the past few minutes, but they’ve barely escaped.
US daily 10 seconds
This muted response suggests that Fitch’s downgrade in August was not a major reason for the subsequent bond crash. The market has a good grasp of U.S. debt and knows it’s a problem. There is no need for the rating agency to explain it in detail. The bigger picture is that the size of bond auctions has increased, reducing buyer appetite. Some are pointing to the ransomware attack at ICBC as a continuing fallout from last week’s weak 30-year bond auction. To test that theory in the long term, we’ll have to wait nearly a month.
There is no coupon auction this week, but next week you will get 2, 10, and 20 coupons.
Technically, there are reasons to be concerned about the 10-year chart. Since the sharp drop at the beginning of the month, it has continued to consolidate in the 4.50-4.67% range. If it breaks below the cap, it could retest the 4.75%-4.80% range, potentially reigniting some of the yield concerns. If that happens, it could erode some of the recent stock market optimism and push USD/JPY to a 32-year high.