The United States holds an AA+ rating with a Stable outlook from both Fitch Ratings and S&P Global Ratings. However, Moody’s Investors Service downgraded the U.S. to Aa1, citing debt and fiscal policy concerns.
In contrast, Canada receives an AA+ from Fitch and AAA from S&P, while Moody’s rates it at Aaa, all with Stable outlooks. The United Kingdom has an AA- from Fitch, AA from S&P, and Aa3 from Moody’s, each rated Stable.
European Ratings
Germany is rated AAA across Fitch, S&P, and Moody’s, maintaining a Stable outlook. For France, Fitch rates it AA-, S&P gives an AA, and Moody’s assigns an Aa2, all Stable. Italy’s ratings are BBB from both Fitch and S&P and Baa3 from Moody’s, with a Stable outlook. Spain holds an A- from Fitch, an A from S&P, and a Baa1 from Moody’s, all with Stable outlooks.
Japan has an A from Fitch, an A+ from S&P, and an A1 from Moody’s, all Stable. China is rated A+ by both Fitch and S&P, and Moody’s rates it A1, with Stable outlooks. Australia holds AAA ratings from Fitch and S&P and an Aaa from Moody’s, maintaining Stability.
The Moody’s downgrade of the U.S. in May 2025, citing debt concerns, has created a clear divergence among rating agencies. With the U.S. debt-to-GDP ratio having climbed to 110% in the second quarter of 2025, we are seeing sustained pressure on U.S. assets. This split rating introduces uncertainty that derivative traders can position for.
We have seen the cost to insure against U.S. debt rise, with 5-year credit default swap (CDS) spreads widening from 25 to 45 basis points after the downgrade and holding there. This suggests that traders should consider strategies that benefit from this increased perception of risk. Historically, when S&P downgraded the U.S. back in 2011, we saw similar volatility and risk-off sentiment persist for months.
Impact on Market Conditions
The downgrade implies higher future borrowing costs, putting upward pressure on Treasury yields. The 10-year Treasury yield has remained elevated around 4.75% since May, and we anticipate it could test higher levels. Traders might look at selling Treasury bond futures or buying options that profit from a further increase in yields.
This fiscal uncertainty has kept market volatility higher than normal. The VIX index has been trading in a range of 18-20, well above the calmer periods we saw in 2024. This environment makes buying protective put options on the S&P 500 or call options on the VIX a viable hedging strategy against a potential market downturn.
The U.S. dollar is now more vulnerable compared to currencies from AAA-rated nations like Canada and Australia. The U.S. Dollar Index (DXY) has already slipped 3% since the Moody’s action. We see potential for further dollar weakness, making long positions in the Canadian dollar or Australian dollar versus the greenback attractive.
Given that Fitch and S&P have maintained a stable outlook, a key focus will be on upcoming fiscal data and Federal Reserve commentary. Any sign of fiscal consolidation could quickly reverse some of these trends, while poor deficit numbers could accelerate them. This divergence in ratings means the market will react sharply to any new information confirming one view over the other.
