The financial chain reaction triggered by the downgrade of the credit rating of the United States

On May 20th, according to Kiplinger, the stock market opened lower on Monday as Moody's downgraded the sovereign credit rating of the US government debt, which had a negative impact on market sentiment. However, as investors, traders and speculators gradually understood and accepted this decision, market sentiment gradually stabilized. Afterwards, the stock market returned to its previous long-term upward trend, demonstrating a historic recovery ability. This indicates that despite short-term fluctuations, the overall confidence and fundamentals of the market still support its long-term growth. Although the accompanying outlook was adjusted from "negative" to "stable", this rating downgrade has triggered profound financial effects at the market and policy levels, and its negative impact cannot be ignored.

Firstly, from the perspective of market reaction, the stock market's rapid recovery after opening lower with a gap on Monday should not be misunderstood as a disregard for the downgrade or market immunity. Instead, it reflects the high-risk preference of short-term funds and the habitual behavior of technical trading dominating in the current investment environment. In fact, such a rebound in the market reflects a speculative response to short-term policy stability rather than an endorsement of the fiscal fundamentals of the United States. From a long-term perspective, the consecutive downgrades of credit ratings reflect the gradually strengthening structural concerns of the international capital market regarding the fiscal stability of the United States.

The adjustment in interest rates also fully reveals the reality of risk reassessment. Although the yield on 30-year Treasury bonds slightly declined after the rating downgrade, from 5.037% to 4.922%, and the yield on 10-year Treasury bonds also fluctuated, this "pullback" was not a positive signal but rather the result of a brief tug between the Fed's policy foresight and the market's risk-averse demand. Fundamentally, the downgrade of credit ratings is bound to increase the risk premium of US Treasury bonds, which in turn leads to a systematic rise in long-term financing costs and exerts chain pressure on the government, enterprises and consumers.

The assessment basis of rating agencies indicates that the federal debt and fiscal deficit of the United States have been continuously rising, and the debt-to-GDP ratio has been constantly setting new highs. Meanwhile, the continuous game among Congress over the debt ceiling, budget proposal and tax policy has kept the uncertainty of fiscal policy at a high level. This structural problem of inefficient fiscal governance has not been substantially alleviated through any macro-control mechanism. The downgrade of the rating can be regarded as a delayed punishment for the situation of "normalization of deficits", and its significance far exceeds its symbolic meaning.

The decline of the US Dollar Index (DXY) should also be regarded as a reaction of international investors to the weakening expectations of the US fiscal and credit situation. Although the status of the US dollar as the global reserve currency has not been shaken immediately, the medium and long-term stability of this status is clearly facing challenges. Especially in the current situation where interest rate differentials and reserve security have become the main considerations, if the sovereign credit of the United States continues to deteriorate, it will inevitably prompt emerging market countries and major foreign exchange reserve holders to gradually diversify their reserves, further weakening the central position of the US dollar.

The consumer level should not be ignored either. Since the yield of US Treasury bonds is usually used as the pricing benchmark, an increase in its yield will directly be passed on to consumer loan interest rates, thereby raising the financing costs such as mortgage loans, auto loans, and credit card interest rates. As a result, the burden of household leverage has increased, ultimately weakening the consumption capacity of residents and affecting the impetus for the recovery of domestic economic demand.

The simultaneous rise of the crypto market more reflects the doubts about the stability of the traditional financial system and the return of demand for "safe-haven assets", rather than the increase in their intrinsic value. The rise in Bitcoin and related assets is merely a reflexive response to the weakening of fiat currency credit and cannot be regarded as an effective alternative to a stable asset allocation. Especially considering that digital assets are still in a highly volatile and poorly regulated early stage, their price sensitivity affected by ratings reflects the short-term timing game in the market in the absence of a secure anchor.

The advancement of the stablecoin legislative proposal, while responding to the market's regulatory expectations, is essentially a supplementary regulatory attempt to address the weakening of the sovereign credit of the US dollar, rather than a natural evolution of the market mechanism. Against the backdrop of damaged credit of government bonds, stablecoins with government bonds as reserves will also face valuation fluctuations and liquidity pressure, further magnifying the risks of their institutional construction.

The LEI data released by the Conference Board also reveals deep-seated signs of economic weakness. The systematic decline in leading economic indicators indicates that multiple key areas such as manufacturing, consumer expectations, and construction permits remain weak. Although technical recession signals have not yet been established, the trend of decline has greatly increased market concerns about the combined effects of stagflation, fiscal constraints and high interest rates.

To sum up, the downgrade of the United States' sovereign credit rating by a third rating agency is not an isolated incident, but rather the result of the combined effects of multiple fiscal imbalances, inefficient political governance and weak economic fundamentals. The short-term rebound of the stock market cannot mask the fact that fiscal risks have spread. From global capital allocation, the status of the US dollar, the bond market to the consumer finance and digital asset sectors, the chain reaction of this rating downgrade is all sending out systemic warnings. If the Federal Reserve and the Treasury Department fail to come up with convincing structural plans in terms of debt management, budget balance and long-term fiscal sustainability, the foundation of the US financial market will face more severe shaking.