When Fitch Ratings downgraded the U.S.’s credit rating from AAA to AA+ on 1 August, analysts were quick to dismiss it as meaningless to investors, citing the stock market’s lack of reaction.

However, bond yields rose, indicating investors are wary of a worse economy ahead, Wall Street Journal analyst Greg Ip wrote in a 10 August essay.

The downgrade “joins a stack of evidence of how risky the nation’s fiscal situation is now,” he wrote.

The risk: growing deficits and high-interest rates could worsen each other.

Today’s circumstance is the opposite of that in 2011 when S&P Ratings downgraded the U.S. rating, Ip noted. Then, budget deficits were necessary to goose the economy after the Great Recession and were easy to finance because of low-interest rates. Unemployment was high and investment low; inflation was negligible.

Now, investment and job growth are robust and interest rates are high. “This is when spending restrictions and tax increases should be in vogue,” Ip wrote.

Instead, the Congressional Budget Office recently boosted its estimate of this year’s budget deficit from 5.5 percent of GDP last year to 6.5 percent now, largely due to the additional cost of higher interest rates on the ballooning national debt. 

A key metric: the 10-year treasury note’s “real return,” which is the percent that investors expect to make after inflation is factored in. That projected yield has risen to 1.7 percent, close to its highest since 2009. In August 2011, it was almost zero.

TRENDPOST: With new spending demands and the U.S. Federal Reserve clearing out the bond holdings it amassed during the COVID War, private investors will be expected to shoulder debt this year equivalent to 7.7 percent of the developed world’s GDP and 9.2 percent in 2024, according to economic consultant Philip Suttle.

In 2011, the proportion investors had to bear was 4.2 percent.

The U.S. is on trend to be spending 10 percent of the annual federal budget on interest expenses by 2025, compared to only 1 percent for other AAA-rated countries, IP pointed out. 

If the dollar was not the world’s reserve currency and the U.S. not seen as a bastion of stability, the U.S.’s credit rating would have been slashed to a level far lower than it was, Ip said.

A reason for Fitch’s decision to down-rate the U.S. was the continuing lack of political gumption to face the debt problem. 

Now, however, “a bond market signaling that the world is no longer safe for deficits may be the first step to tackling them,” Ip wrote.