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Last May, Moody's ratings did something that had not happened in the entire history of the United States credit rating system. It stripped America of its last remaining triple A credit rating. Standard & Poor's had already done it in 2011. Fitch had done it in 2023. For a full year after Fitch's downgrade, Moody's had been the final holdout, the last of the three major agencies to still tell the world that American government debt was the safest, most reliable asset on the planet.
Then, on May 16th, 2025, Moody's made it unanimous. The United States no longer holds a perfect credit rating from any of the three agencies that global investors depend on to tell them how safe a country's debt actually is. That was the first domino. And over the 12 months since, the dominoes that were always lined up behind it have been falling one by one in ways that most Americans have not been watching closely, but that are shaping the economic reality they live in every day.
The mortgage rates they pay, the interest on their car loans, the cost of financing the programs that fund their hospitals, their schools, and their retirement. Every one of those costs is connected to what is happening right now in the bond market. And what is happening in the bond market is something that former Treasury Secretary Henry Paulson, JP Morgan CEO Jamie Dimon, and some of the most respected economists in the world have described in the same word, dangerous.
Here is the full story of what the dominoes are, how they connect, and what they mean for the financial future of every American. Start with what Moody's actually said when it issued its downgrade in May 2025, because the explanation it gave is not just a historical footnote. It is a description of a structural problem that has gotten worse, not better, in the 12 months since.
Moody's wrote that successive United States administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. It said it did not believe that material multi-year reductions in mandatory spending and deficits would result from current fiscal proposals under consideration.
It projected that if the 2017 Tax Cuts and Jobs Act were extended, it would add around $4 trillion to the federal fiscal deficit over the next decade. In July 2025, Congress passed the One Big Beautiful Bill Act, the sweeping Republican reconciliation legislation. The bill extended and expanded the 2017 tax cuts.
It raised the debt ceiling by $5 trillion from $36.1 trillion to $41.1 trillion. The Congressional Budget Office analyzed the bill's provisions and found that the tax cuts and new spending it contained would add approximately $3.8 trillion to the national deficit over 10 years. The Committee for a Responsible Federal Budget, a non-partisan fiscal watchdog organization, calculated the total debt increase at $4.1 trillion including interest or $4.2 trillion after accounting for dynamic economic effects.
In other words, within 2 months of Moody's downgrade warning that America was failing to control its deficits, Congress passed legislation that will add more than $4 trillion to the deficit and the president signed it. The national debt as of May 2026 stands at more than $38 trillion. The federal government is running annual budget deficits of approximately $2 trillion per year.
For the first time in American history, interest payments alone on the national debt surpassed $1 trillion in fiscal year 2025. That is more than the entire defense budget. Moody's projects that federal interest payments will absorb approximately 30% of all federal revenue by 2035, up from about 18% in 2024, and 9% in 2021.
Within a decade, nearly one in three dollars the federal government collects in taxes will go directly to paying interest on existing debt, leaving less for everything else, defense, social security, Medicare, infrastructure, education, and every other function the government performs. To understand why this creates a dangerous spiral, rather than just a large bill, you need to understand how the bond market works, and why it has begun sending signals that experts are describing as unprecedented.
The United States finances its deficit by selling Treasury bonds to investors. Those investors, which include foreign governments, pension funds, insurance companies, hedge funds, and individual savers around the world, lend money to the American government in exchange for interest payments. The interest rate they demand, which shows up as the Treasury yield, reflects how risky they think it is to lend to the United States.
When they consider American debt more risky, they demand higher yields. When yields rise, everything built on top of Treasury rates rises with them, mortgage rates, car loan rates, student loan rates, corporate borrowing costs, the entire interest rate structure of the American economy is anchored to the Treasury yield.
For decades, investors accepted unusually low yields on Treasury bonds because American debt was considered the safest asset in the world. Economists call this the convenience yield, the premium investors were willing to pay for the safety, liquidity, and reliability of holding United States government debt.
That premium is now disappearing. Research by Wensyn Dou, a Harvard professor and former Federal Reserve economist, found that the convenience yield has been reduced by nearly half a percentage point since the global financial crisis and is now negative when measured against currency hedged debt from other major developed countries.
In plain terms, Treasury bonds are no longer automatically treated as the world's safest investment. Investors are now requiring more to hold them, particularly the longer-dated bonds that are most exposed to the risks of rising deficits. The changing composition of who buys American debt makes this worse.
In the early 2010s, foreign governments accounted for more than 40% of Treasury bond holdings. That reliable block of buyers, dominated by China and Japan, allowed the United States to borrow vast sums at artificially low rates. Today, foreign governments make up less than 15% of the overall Treasury market.
China has cut its Treasury holdings from a peak of more than 1.3 trillion dollars to approximately 693 billion dollars. Japan, which still holds 1.2 trillion dollars in Treasuries, has been gradually reducing its exposure. In their place, less patient investors, hedge funds, and speculative traders have filled the gap.
These are not the kind of buyers who hold bonds through volatility. They are the kind who sell when they get nervous, which amplifies market moves in dangerous directions. The IMF has warned that what it calls the safety premium on Treasury bonds is disappearing. Mark Malik, chief investment officer at Siebert Financial, noted in a widely circulated market analysis that the Federal Reserve has cut interest rates by 175 basis points since mid-2024, but the 10-year Treasury yield has declined only about 35 basis points, while the 30-year yield has touched 5%.
He called this disconnect unprecedented based on any analysis of the relationship between Fed policy and long-term yields going back to 1990. What the disconnect means is that the bond market is telling the Fed that cutting rates is not enough to bring yields down because the problem is not monetary policy.
The problem is fiscal credibility. There are too many bonds being issued relative to the level of demand and the market is requiring higher yields to absorb them. The numbers behind that supply problem are specific and alarming. The Treasury Department announced this month that it expects to borrow $189 billion in the current quarter, which is $79 billion more than it projected just 3 months ago.
After adjusting for a larger than expected cash balance, the actual new borrowing guidance is $122 billion higher than what was planned. For context, the Treasury borrowed $577 billion in the first quarter of 2026 and expects to borrow $671 billion in the third quarter, the July through September period.
These are not exceptional numbers caused by a crisis. They are the routine borrowing requirements of a government running a $2 trillion annual deficit. The Government Accountability Office published a formal assessment this spring finding that the deteriorating fiscal outlook poses risks to Treasury's debt management and that changing fiscal conditions, including larger structural deficits and unexpected increases in borrowing needs, have already forced the Treasury to significantly increase its issuance of short-term bills as a stopgap.
That stopgap itself carries risks. When a government finances its long-term obligations with short-term debt, it must constantly refinance, rolling over that debt at whatever the prevailing interest rate happens to be at the moment of renewal. If interest rates are high at that moment, the cost of the debt spikes.
If market conditions shift suddenly, the government may face difficulties selling the new debt at all. Apollo chief economist Torsten Slok warned that the enormous volume of fixed income products coming to market in 2026, including not only Treasury bonds, but also a flood of corporate debt from technology companies building AI infrastructure, is likely to put significant upward pressure on rates and credit spreads throughout the year.
There are too many bonds competing for too few buyers. Henry Paulson, who served as Treasury Secretary during the 2008 financial crisis and managed the most serious American financial emergency in a generation, appeared on Bloomberg Television in April to describe what he sees happening. He said that a scenario where demand for Treasuries falls and foreign interest in the market declines is a dangerous thing.
He noted that Treasury securities underpin multiple parts of the global financial system and are foundational to how the United States government finances itself. He said that if enough investors backed out of buying Treasuries, the Federal Reserve would step in as a buyer of last resort, but that dynamic could accelerate the debt spiral by further eroding confidence in American economic stability.
Jamie Dimon, chief executive officer of JPMorgan, has issued similar warnings on multiple occasions. He told reporters earlier this year that there will be a bond crisis and then the country will have to deal with it. The One Big Beautiful Bill has now made the fiscal trajectory materially worse. The CBO found that the bill adds $3.8 trillion in new deficits over a decade.
Bond markets reacted to the House passage of the bill by pushing the 10-year Treasury yield above 4.6% and the 30-year yield above 5.1% the highest level since October 2023. Economist Richard Portes told Newsweek that the biggest fault of the bill is its total disregard of the very dangerous fiscal position of the United States.
He said the safety of United States Treasuries is threatened and that there is a serious risk of a bond market crisis that could lead to a wider financial crisis with repercussions throughout the world. What makes this moment distinct from previous periods of deficit concern is the convergence of factors that are all pushing in the same direction simultaneously.
Deficits growing, interest costs at record levels, foreign buyers pulling back, the convenience yield disappearing, the one big beautiful bill adding trillions more, the Iran war adding defense spending the budget did not plan for, and a Federal Reserve that is under pressure not to raise rates even as inflation runs above target because raising rates makes the interest cost problem dramatically worse.
The Moody's downgrade 1 year ago was a warning signal. The bond market's behavior since then, yields rising persistently despite Fed rate cuts, foreign buyers retreating, the 30-year touching 5% repeatedly, a $50 trillion debt ceiling being discussed in Washington with less alarm than it deserves, is a confirmation that the warning was warranted.
For the average American, this is not an abstract fiscal debate. The 30-year mortgage rate is directly tied to the 30-year Treasury yield. When that yield approaches 5%, mortgage rates move into the mid to high 6% range, keeping millions of Americans locked out of homeownership. Every percentage point of additional yield on the national debt adds tens of billions of dollars to annual interest payments, crowding out spending on Social Security cost-of-living adjustments, Medicare reimbursements, Medicaid, veterans benefits, and every other program funded by federal revenue.
The choice, as the debt spiral tightens, is between raising taxes, cutting programs, or continuing to borrow at escalating cost. Congress has so far chosen the third option. The first domino fell on May 16th, 2025. Moody's issued its warning in plain language. The United States was failing to control its deficits.
The fiscal trajectory was unsustainable, and the assumption that global investors would always be willing to absorb American debt at artificially low yield was no longer guaranteed. In the 12 months since, the federal government has added trillions more to the deficit through legislation. The convenience yield has continued to disappear.
Foreign buyers have continued to pull back. The bond market has been shouting in ways that experts describe as unprecedented. And the people who managed the last major American financial crisis are using the word dangerous in public. This is what the beginning of a debt crisis looks like before it becomes undeniable.
It does not arrive with a single crash. It arrives with a downgrade, then rising yields, then retreating buyers, then a bill that adds 4 trillion more, then a bond market that is already pricing in the risk, and then a public that is still waiting to be told that the trajectory they're on has a destination that nobody in Washington is prepared to describe honestly.
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