Wells Fargo on Govt Debt Downgrade
Wells Fargo published a Fixed Income Strategy titled, "Aligning Investment Guidelines After U.S. Government Downgrade," which tells us, "On May 16th, 2025, Moody's Ratings downgraded the long-term issuer rating of the U.S. government to Aa1 from Aaa, citing ongoing fiscal concerns.... The recent decision by Moody's brought the U.S. government's credit profile into alignment with the other two Nationally Recognized Statistical Rating Organizations (NRSROs).... [But] the market reaction was fairly limited since the latest Moody's downgrade was not necessarily a surprise. Still, downgrades over the past week have created questions from investors." Wells writes, "Corporate and public entity investors are heavy users of Treasury bills and other products directly related to the U.S. government such as those from U.S. Agencies and Government Sponsored Enterprises as well as products substantially invested in government securities, namely government money market funds. The downgrade of the U.S. government had a direct impact on related organizations, most notably U.S. Agencies and GSEs that are rated by Moody's and issue (or have outstanding debt) in fixed income markets. On Monday of this week, the impacted organizations include Fannie Mae, Freddie Mac, FHLBank System, Farm Credit System, REFCO, Private Export Funding Corporation, and the Tennessee Valley Authority, which all now have a Moody's long-term rating of Aa1. In its review of government MMFs, Moody's shared that it is maintaining a Aaamf rating on government money market funds as its assessment considers many elements, for which credit quality is just one.... In support of maintaining a Aaamf rating for relevant money market funds, Moody's states, 'These funds will continue to demonstrate a very strong ability to meet the dual objectives of providing liquidity and preserving capital.'" They add, "Though the concern from investors about the credit of government MMFs is understandable due to the bulk of underlying instruments, a one notch long-term rating downgrade of the U.S. Treasury and related government issuers, is not enough in isolation to change the rating of a fund. According to an FAQ written by the Investment Company Institute several years ago which directly answers if a downgrade of the U.S. government affects money market funds, 'If the US government short-term credit rating were downgraded, money market funds might be affected, but likely only if the short-term credit rating dropped below investment grade.' Moreover, several MMF families have published announcements this week to reassure investors that AAA ratings are not at risk. A selection of these fund family perspectives is highlighted below." They quote, "AllSpring. Despite the rating downgrade to the U.S. government, Allspring will continue to maintain its Aaa-mf (triple-A money fund) Moody’s rating on all of its government and Treasury money market funds. The funds have continued to maintain their AAAm rating from S&P despite S&P's downgrade of U.S. government debt in 2011 [and] Dreyfus. We do not expect any impact on Dreyfus Aaa/AAA money market fund (MMF) ratings as a result of the downgrade. We expect limited market reaction similar to the anticipated Fitch downgrade in 2023 as opposed to the S&P surprise action in 2011. We do not expect to see any MMF outflows on the back of the downgrade. We do not believe this will have any impact on MMF investments as it relates to changing haircuts in their respective collateral schedules."
