US federal debt has reached unprecedented historic levels, both in absolute terms and as a proportion of GDP. With refinancing dynamics growing ever more burdensome, the recent downgrade of the sovereign credit rating by Moody’s on 16 May 2025 represents a watershed event. In an increasingly risk-sensitive global environment, concerns over fiscal stability, political credibility and international confidence are intensifying.

Debt on an Unprecedented Scale: $34 Trillion and Rising

In 2025, US federal debt surpassed $34 trillion, pushing the debt-to-GDP ratio beyond 120%. The principal causes of this exponential growth are:

  • decades of expansionary fiscal policy,
  • tax cuts unaccompanied by corresponding spending reductions,
  • extraordinary interventions during financial and pandemic crises,
  • the structural inertia of welfare programmes.

This debt burden requires continuous refinancing, with ongoing issuance of new Treasury securities, many at short or medium maturities. The interest rate increases enacted by the Federal Reserve between 2022 and 2024 have made this refinancing progressively more costly.

The Moody’s Downgrade: The Fall of the Triple-A

On 16 May 2025, Moody’s downgraded the United States’ sovereign debt rating from Aaa to Aa1, with a negative outlook. This is the final link in a chain that began in 2011 with S&P and continued in 2023 with Fitch. Now the last remaining triple-A has fallen.

Among the reasons cited by Moody’s:

  • The absence of a credible plan to contain the debt;
  • The continued recourse to debt financing of current expenditure, against a backdrop of economic slowdown;
  • Recurring political tensions surrounding the debt ceiling, which generate market uncertainty;
  • The structural increase in interest expenditure, which in 2025 will exceed $1.2 trillion per annum.

The downgrade sends a clear signal: even US debt can lose its status as a risk-free investment.

High Rates and Refinancing: An Increasingly Precarious Balance

10-year US Treasury securities currently offer yields of between 4.5% and 5%, considerably higher than in the previous decade. This normalisation of rates, whilst reflecting a return to less accommodative monetary conditions, simultaneously places the federal budget under strain.

The principal consequences are:

  • Rising cost of new debt: each additional percentage point translates into tens of billions of dollars in additional interest payments.
  • Risk of a deficit-interest spiral: greater interest expenditure leaves less headroom for public services and investment.
  • Greater vulnerability to external shocks: geopolitical, financial, or related to demand for Treasury securities.

Possible Strategies Between the Treasury and the Federal Reserve

Faced with this situation, the government and the Federal Reserve may adopt certain countermeasures, albeit with increasingly limited room for manoeuvre.

1. Extending Maturities

The Treasury may seek to issue longer-dated securities in order to lock in current rates over extended horizons. However, this entails higher immediate costs, which are unappealing during a period of elevated spending.

2. Fiscal Consolidation

The structural strategy would involve:

  • a review of tax reliefs and exemptions,
  • containment of mandatory expenditure (Social Security, Medicare),
  • rationalisation of military and discretionary spending.

However, the political deadlock in Congress makes wide-ranging reform unlikely in the near term.

3. A More Accommodative Monetary Policy

The Federal Reserve could intervene through:

  • an interest rate cut, should macroeconomic conditions permit;
  • a return to quantitative easing, directly supporting the Treasury market.

However, this would carry the risk of reigniting inflation and raising doubts about the Fed’s neutrality.

Declining International Confidence

A crucial factor is the position of foreign investors, who hold approximately one third of federal debt. Countries such as Japan, China, the United Kingdom and Ireland are among the principal creditors.

In recent years, a number of concerning trends have emerged:

  • China has reduced its holdings of US securities, partly for geopolitical reasons;
  • Central banks are diversifying their reserves, shifting towards gold, alternative currencies and real assets;
  • The perception of the dollar as a “safe haven” is no longer absolute.

A structural contraction in foreign demand for Treasuries would entail:

  • increased dependence on domestic investors,
  • upward pressure on yields,
  • the risk of a currency shock affecting the dollar.

Conclusions: Unlimited Credit Can No Longer Be Taken for Granted

For decades, the United States has benefited from unlimited global confidence, underpinned by its political stability, the strength of the dollar and the weight of the American economy in the world. The Moody’s downgrade of 16 May 2025 represents a symbolic and substantive turning point: markets are beginning to view US debt as exposed to concrete risks.

Without a change of course in fiscal management and domestic political cohesion, the United States could be heading towards a progressive erosion of its global financial primacy. The window for corrective action has not yet closed, but the room for manoeuvre is narrowing.