US TSYS: Bear Steepening Extends As 30s Hover Round 5%; Does Downgrade Matter?

UST bear steepening has extended this morning, as markets digest Moody’s US ratings downgrade late Friday. While the move may not have been expected, Moody’s were previously the last of the three major agencies to still assign the top rating (Aaa) to US debt.

• US 5s30s is 5bps higher at 90bps, still shy of the multi-year high of 100bps on May 1.
• 30-year yields are up 5bps, hovering around the 5% handle once again. This level has provided solid resistance since Q4 2023, and was most recently respected last Thursday.
• As noted above, early moves in USD FX suggest the deterioration in US credit worthiness was partially priced in through the recent tax bill headlines and tariff volatility. Meanwhile, Tsy Secretary Bessent played down the ratings action over the weekend, noting Moody’s – and ratings agencies more generally – were a “lagging indicator” of US fiscal health.
• Over the weekend, FT Alphaville weighed in on whether the downgrade matters from a technical perspective. They wrote that “banks’ risk-weighted capital asset calculations look unlikely to be impacted by the rating change. This is because regulators don’t tend to differentiate between Aaa and Aa1 when setting capital risk-weights”.
• Additionally, they cited Barclays research that noted: “For collateral purposes, a downgrade to Aa1 is also unlikely to have an effect. For instance, DTCC and CME refer to the asset class as US Treasuries and the haircut is a function of the maturity and security type (TIPS/FRNs) but not the ratings. At LCH, a downgrade to Aa1 is unlikely to lead to a change. For instance, USTs and Gilts have similar haircuts, even as the latter are rated lower”….”Legislation since the financial crisis has reduced the use of explicit ratings guidelines in investment mandates”.