The United States has an AA+ rating with a Stable outlook from Fitch Ratings and S&P Global Ratings. However, Moody’s Investors Service has downgraded the U.S. to Aa1, citing concerns over debt and fiscal policy. In comparison, Canada holds an AA+ rating from Fitch and AAA from S&P, while Moody’s rates it Aaa, all with Stable outlooks. The United Kingdom has an AA- from Fitch, AA from S&P, and Aa3 from Moody’s, with each rating labeled as Stable.

European Ratings

Germany is rated AAA by Fitch, S&P, and Moody’s, all with a Stable outlook. France receives an AA- from Fitch, an AA from S&P, and an Aa2 from Moody’s, with Stable outlooks. Italy’s ratings are BBB from both Fitch and S&P and Baa3 from Moody’s, maintaining a Stable outlook. Spain has ratings of A- from Fitch, A from S&P, and Baa1 from Moody’s, all rated as Stable. Japan is rated A by Fitch, A+ by S&P, and A1 by Moody’s, all with Stable outlooks. China holds an A+ rating from both Fitch and S&P, and an A1 from Moody’s, all rated Stable. Australia also maintains AAA ratings from Fitch and S&P, along with an Aaa from Moody’s, ensuring Stability. Moody’s downgrade of the U.S. in May 2025 has highlighted the differences between the ratings agencies. As the U.S. debt-to-GDP ratio rose to 110% in the second quarter of 2025, U.S. assets face ongoing pressure. This separate rating creates uncertainty for derivative traders. We’ve noticed that the cost to insure U.S. debt has increased. The 5-year credit default swap (CDS) spreads widened from 25 to 45 basis points following the downgrade and have remained there. This indicates that traders may want to adopt strategies to take advantage of the heightened perception of risk. Similar volatility followed S&P’s downgrade of the U.S. in 2011, lasting several months.

Impact on Market Conditions

This downgrade is likely to result in higher future borrowing costs, leading to an increase in Treasury yields. The 10-year Treasury yield has stayed high around 4.75% since May, and we expect it could rise even further. Traders may consider selling Treasury bond futures or purchasing options that benefit from a climb in yields. Fiscal uncertainty has kept market volatility above normal levels. The VIX index has been fluctuating between 18 and 20, significantly higher than the calmer phases seen in 2024. This environment makes purchasing protective put options on the S&P 500 or call options on the VIX a smart hedging approach against a possible market dip. The U.S. dollar is currently more susceptible compared to currencies from AAA-rated countries like Canada and Australia. The U.S. Dollar Index (DXY) has already dropped 3% since Moody’s downgrade. We anticipate further dollar weakness, making long positions in the Canadian dollar or Australian dollar against the U.S. dollar appealing. As Fitch and S&P keep a stable outlook, all eyes will be on upcoming fiscal data and comments from the Federal Reserve. Any indication of fiscal tightening could swiftly change existing trends, while disappointing deficit reports could hasten them. The varying ratings mean the market will react sharply to any new information that supports one viewpoint over the other. Create your live VT Markets account and start trading now.

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