Key Takeaways
- Moodys’ downgrade of the U.S. sovereign credit rating has made investors slightly less confident in the government’s debt, pushing up yields on 10-year treasuries.
- Higher yields translate into higher mortgage rates for consumers.
- One housing expert said the downgrade indicates that mortgage rates could hover around 7% for the foreseeable future.
The downgrade of the U.S. sovereign credit rating on Friday will likely mean higher borrowing costs on mortgages.
On Friday, Moody’s downgraded its rating for debt held by the U.S. government one notch to the second-highest rung on its 21-level scale of creditworthiness, citing the government’s persistent and likely worsening budget deficit. Moody’s was the last major credit rating agency to downgrade the U.S. from the highest rating, following S&P in 2011 and Fitch in 2023.
The stock market largely shrugged off the downgrade as old news: the ding to the government’s credit had been brewing since at least 2023, when Moody’s changed its outlook for the rating to “negative” from “stable.” But it was a different story for the bond market, where government-issued debt is bought and sold.
Yields on 10-year treasuries—the interest the government pays to borrow money for a decade—are especially sensitive to credit downgrades and can reflect a loss of confidence in the federal government’s longer-term financial outlook.
For consumers, higher yields on the 10-year treasury have a major consequence in the form of higher mortgage rates. Interest rates on 30-year fixed mortgages are tied to treasury yields, so the uptick could mean higher borrowing costs for homebuyers. The average rate on a 30-year fixed mortgage has hovered under 7% this year, around double typical pre-pandemic levels and far higher than the rock-bottom rates available during the pandemic years.
The downgrade is bad news for would-be homebuyers waiting for mortgage payments to become more affordable, Jonathan Miller, CEO of real estate appraisal and consulting firm Miller Samuel Inc., wrote in a commentary.
“Mortgage rates will likely hover at or above 7% for the foreseeable future, pushing more consumers into the rental market,” Miller wrote.
