SignalPlus Macro Analysis Special Edition: AA

Source: IgniteRatings, X Moody's has downgraded the long-term issuer and senior unsecured debt ratings of the U.S. government from Aaa to Aa1, and revised the outlook from negative to stable. This downgrade reflects the continuous rise in the proportion of U.S. government debt and interest payments over the past decade, significantly higher than that of other sovereign countries with the same rating. — Moody's, May 16, 2025 Moody's downgraded the long-term credit rating of the United States, indicating that the U.S. sovereign debt credit has been removed from the AAA category by all major rating agencies. This news was released a few hours after the close of the U.S. stock market last Friday, and it is reported to have prompted the U.S. House Budget Committee to quickly advance the "One, Big, Beautiful Bill" on Sunday night in an effort to minimize potential market impacts. Setting aside the political maneuvering and the theatrics of the budget bill, is credit rating still important? Readers may still remember that Silicon Valley Bank (SVB) held an "A rating" even before its collapse, and more seasoned readers may not have forgotten the absurdly high ratings awarded to CDOs, CMOs, subprime mortgages, and Chinese real estate bonds. Regarding this issue, we have organized the relevant points in FAQ format as follows: When has the United States been downgraded in the past? July 2011: S&P August 2023: Fitch Will there be immediate technological impacts? Institutions that are restricted by ratings and cannot hold non-AAA rated bonds. Due to the scale and irreplaceability of US Treasuries as an asset class, these institutions often adjust their internal rules (as has indeed been the case in the past). Impact on Centralized Clearing The handling of government bonds as collateral by DTCC and CME is based on duration and bond type to set discounts (haircut), with less reliance on ratings. Impact on Money Market Funds Short-duration configurations have weakened the impact of credit ratings; in fact, even during past downgrades and debt limit disputes, demand for treasury bills has shown almost no fluctuation. The long-term reserve asset status of U.S. Treasury bonds In fact, President Trump's tariff policy has a more profound impact on global demand for U.S. debt due to the global restructuring of trade than any rating agency. How has the market reacted in the past? In 2011, during the downgrade, it was the first downgrade and amidst the first "debt ceiling crisis," the market was quite shocked. The stock market fell about 20% from July to August, but due to risk hedging and the quantitative easing policy that was ongoing at the time, the yield on 10-year U.S. Treasuries actually dropped by 120 basis points (i.e., prices increased) after the downgrade.

In 2023, the downgrade occurred in August, right after the early summer debt ceiling crisis, while the U.S. Treasury was also recovering market liquidity by rebuilding the Treasury's general account and issuing a large amount of U.S. debt. At that time, the SPX index fell by about 10%, and U.S. Treasury yields continued to rise by about 50 basis points during the year. Although this credit rating downgrade may have accelerated the market's relative performance, overall, it did not bring about a fundamental change in the market landscape.

Will this downgrade affect fiscal decisions? The House Budget Committee did indeed advance the budget proposal on Sunday night, showing a certain degree of intent to mitigate potential market shocks. Will there be cuts to dollar spending and control over the deficit? Although downgrades may lend more weight to the voices of fiscal hawks, it is unlikely to change the long-term trend of uncontrolled spending and concerns over the unsustainability of U.S. Treasury supply. This will increase the uncertainty regarding the final passage timing of the bill and whether there will be delays, and due to the adverse effects on the budget, it may undermine the potential positive effects of tax cuts. What could be the market's possible reaction? In terms of stocks, given past experience and the rapid rise of the market in recent weeks without a broad rally, the short-term response of the stock market is likely to be an instinctive decline. The trend of the bond market is more difficult to predict and depends on factors such as the extent of the decline in stock market risk appetite, the game between fiscal hawks and Trump, whether the Senate can smoothly pass the budget proposal before the debt ceiling deadline, and whether this incident will affect Trump's 90-day tariff ceasefire agreement. Overall, US stocks, US bonds, and the US dollar may face negative risks.

What is the current positioning of the macro market? Macro funds, systemic funds, and quantitative funds have mostly covered their short positions / reduced their holdings, and have even turned to long positions.

Last week, the market experienced a small "rally" as traders hurried to cover short positions, and the Advance-Decline Line indicator on the New York Stock Exchange reached a recent high.

How did the economic data perform last week? It's quite bad for the bond market. Despite recent easing of tariff policies, the University of Michigan's Consumer Sentiment Index has still seen a sharp decline. The overall index has dropped to its lowest point since June 2022, nearly approaching the lowest level since the 1980s. Long-term inflation expectations have risen to their highest level since 1991 (4.6%). The one-year inflation expectation is as high as 7.3%, the highest level since 1981.

Should the market be concerned about foreign capital selling off? Let’s take a look back at the situation in the past few months. Non-U.S. investors have stopped increasing their investments in U.S. equity funds since March and have become net sellers of bond funds, a trend that may continue in the short term.

But in terms of actual impact, bank data shows that in 2024, the total amount of dollar assets held by foreign investors is approximately $57 trillion, significantly up from $2.2 trillion in 1990. Of this, about $17 trillion is in stock assets and $15 trillion is in bonds. In other words, foreign capital holds about 20% of the total supply of U.S. stocks and 30% of the total supply of U.S. bonds. This is not a small amount, and it cannot be casually sold off or reduced significantly without affecting the entire capital market structure. Furthermore, assets are dispersed among different foreign holders, and any rash action by one party will involve the strategic reactions of other participants. In terms of the stock market, the key still lies in the profitability performance of companies, which has been quite good so far. According to JPM data, the overall profits of the SPX index in the first quarter exceeded expectations by about 8%, with 70% of companies having announced their earnings reports, of which 54% had revenues above expectations, and 70% had profits exceeding expectations, while the EPS growth of the Mag-7 reached as high as 28%, far ahead of the index.

In terms of holding structure (regardless of vague offshore structures such as Cayman), the United Kingdom, Canada and Japan are currently the top three holders of US assets in the world, and they are also close allies with the United States. China is only in fourth place, with a share of about 4%, which is significantly lower than the 8–9% of the previous group.

According to trends over the past month, Japanese investors have indeed reduced their holdings in U.S. Treasuries, but at the same time significantly increased their investments in U.S. stocks. Therefore, this seems more like an adjustment in asset allocation rather than a true de-dollarization. In short, it is unlikely that there will be a large-scale withdrawal of funds or a shift away from the dollar in the short term.

How is the cryptocurrency performing? Interestingly, despite the gold price falling by about 7% from its peak, cryptocurrency prices have remained stable throughout the trend. Unlike the previous months where gold prices moved in sync with BTC, recently, BTC has continued to rise even as gold prices have weakened, which is also reflected in the ETF fund flows. Gold ETFs have seen outflows, while BTC ETFs have experienced a slight increase in inflows, and CME's gold and BTC futures positions show a similar situation.

Overall, as the macro market stabilizes and the dollar depreciation trade is reflected across most asset classes, we expect the breakdown of correlations and relative value opportunities among these micro-assets to continue until the next round of significant geopolitical developments truly materializes. Wishing everyone successful trading!