U.S. credit quality: a turning point?
2 DEC, 2025
By Amar Reganti, Fixed Income Strategist at Wellington Management
When Standard & Poor’s downgraded the United States from its top credit rating during the debt-ceiling standoff in the summer of 2011, I was working at the Treasury, in the Office of Debt Management. I was confident it was an error and that the U.S. would maintain the rest of its excellent ratings, which in my view reflected the world’s richest and most dynamic economy. Since then, other rating agencies have followed suit: Fitch downgraded U.S. debt in 2023, and Moody’s — the last holdout — took the same path in May of this year.
Why should investors worry about this third and final downgrade? What is driving it? This article explores what the deterioration in U.S. creditworthiness means for investors.
How to interpret Moody’s downgrade
Moody’s decision reflects several complex issues, including:
- The U.S. dollar’s status as a reserve currency
- Debt sustainability
- The national policy-making process
- The existence of foreign alternatives to the U.S. dollar (USD)
Although Moody’s cited high levels of public debt and rising interest-expense burdens, the downgrade also reflects a broader erosion of U.S. policymaking mechanisms and global prestige. Even before the current administration took office, domestic policy formation showed signs of dysfunction, with repeated debt-ceiling confrontations and occasional government shutdowns. Recent policies may have brought these weaknesses to a critical point.
Could additional downgrades occur? Moody’s has expressed an intention to maintain the current rating, but it has warned that a breakdown in institutional relations — something plausible in the face of increasingly unconventional policies — could justify a reassessment.
Still, the United States remains the world’s largest capital market. The size, depth, and liquidity of its Treasury market — nearly $25 trillion — dwarf every other sovereign bond market. The relative scale of the tradable Treasury market remains a decisive force in the functioning of global financial markets.
Threats to the Federal Reserve’s independence
The rating downgrade, and the reputational concerns that come with it, are emerging alongside questions about the independence of the U.S. Federal Reserve. Pressure from the current administration to lower short-term interest rates could prove costly if the Fed — mandated to balance growth and inflation — deviates too far from its mission.
In addition, Fed Chair Jerome Powell, who has often disagreed with the president on rate policy, is likely to be replaced in May 2026. Other Board seats will also turn over next year, raising the possibility that the institution becomes more aligned with the administration and less independent from the executive branch.
What would this mean for investors?
If political pressure to cut rates intensifies and Fed independence erodes, the bond market will respond. Term premia — the extra compensation required for holding longer-duration bonds — would likely increase. Over the longer term, investors should also monitor issues related to regulation, oversight, and the structural functioning of the central bank itself.
Can the dollar maintain its reserve-currency status?
Another major factor in U.S. credit quality is the U.S. dollar, which has underperformed this year, partly due to politically driven capital outflows. Its stagnating performance may suggest a fading sense of U.S. exceptionalism, putting at risk the dollar’s historic status as a safe-haven asset.
The dollar has long been the world’s primary reserve currency, used to price and settle global trade in commodities and a wide range of goods. If the dollar were to lose this status, the result would be a structural deterioration affecting currency-hedging strategies, accelerating shifts away from U.S. risk assets such as equities, and fundamentally altering the standard of living within the U.S. economy.
Although this risk deserves close monitoring, investors should keep perspective. Despite recent developments, the dollar still accounts for about 40% of global trade invoicing, even when the U.S. is not the final destination of those transactions.¹
What are the investment implications?
Concerns about U.S. creditworthiness, Federal Reserve independence, and the dollar’s reserve-currency status are significant and understandably unsettling, given the centrality of the USD in the global financial system. While they warrant attention, they should not prompt rash reactions. Instead, they call for thoughtful preparation and diversification.
From a fixed-income perspective, investors have three main ways to mitigate pressures stemming from weakening U.S. credit fundamentals:
1. Diversify beyond the U.S.
Global sovereign and currency strategies — especially those less tied to benchmark constraints — can help manage volatility stemming from tariffs and the late-cycle environment. Many of these markets offered near-zero yields only a few years ago, but economic and political shifts have pushed yields into positive territory. This can involve both traditional global fixed-income markets and more dynamic hedge-fund exposures.
2. Consider local-currency emerging-market debt
This asset class offers attractive yields compared with developed markets. In addition, stable inflation in many EM countries allows their central banks to cut policy rates, generating a cyclical boost that can complement a global fixed-income strategy.
Important caveat: this is a return-seeking strategy — not a substitute for developed-market sovereign debt or U.S. Treasuries. A skilled active manager should weigh the pros and cons before deciding on allocation.
3. Adopt an active approach
During periods of stress and uncertainty, active management tends to outperform passive strategies thanks to its agility and flexibility.
¹ Anja Brüggen, Georgios Georgiadis & Arnaud Mehl, Global Trade Invoicing Patterns: New Insights and the Influence of Geopolitics, European Central Bank, June 2025.
