Why a 'decade of reckoning' is coming to the bond market

Yahoo

18-06-2025

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The recent downgrade to the US credit rating could be the tip of the proverbial iceberg.
'I don't know if we're going to have a day of reckoning or a decade of reckoning,' Brookings Institution's Ben Harris told Yahoo Finance Executive Editor Brian Sozzi on a new Opening Bid podcast (see video above or listen below). 'I don't know if this is going to happen slowly or if it's going to happen quickly.'
'When Moody's downgrades your credit rating, even though it's to be expected, that's a red flag,' the director of economic studies said. He noted that default hasn't been a risk in the past, and investors don't price in a probability of default. The US Treasury might have some inflation, currency, or other risks, but investors expect to be paid back.
'If we go from 100% chance of getting paid on your Treasury to 99.8% chance of getting paid on Treasury, that is a massive shift,' Harris explained. 'This is no longer a risk-free asset. This is a risky asset in terms of default risk, and that makes our whole fiscal outlook that much worse.'
Harris most recently served as assistant secretary for economic policy and chief economist at the US Treasury Department. He is widely seen as the key architect of the Biden administration's economic plan.
On May 16, Moody's downgraded the US credit rating to AA1 from its longstanding position of AAA. Then, on May 22, the House passed the Trump administration's reconciliation package, nicknamed the 'big, beautiful bill,' which included tax cuts and a $4 trillion lift to the debt ceiling.
The yield on the 10-year Treasury (^TNX) has continued to climb amid fears of an out-of-control debt position for the US.
Read more: What is the 10-year Treasury note, and how does it affect your finances?
Harris said that if interest rates climb toward 5% on the 10-year or even 6% or higher, investors may buy more Treasurys instead of other assets, like corporate investments or stocks. This will drag on the overall economy, which Harris says is "guaranteed" if the US takes on another $4 trillion or more in debt.
'The real threat is that this could spark some sort of fiscal crisis,' Harris said. 'And that could happen if we get to a debt ceiling where you start seeing default on Treasury securities. That could happen if investors lose faith in the independence of the Fed. That could happen if you see really stark shifts from foreign central banks away from Treasurys, like some sort of official proclamation that we're not going to buy US Treasurys anymore.'
The impact extends to credit card and mortgage rates, which typically follow the Treasury rate. However, Harris said, an actual default would only happen due to political mistakes.
'We are the richest country on Earth, and there are plenty of assets to pay the coupon payments and the principal on US debt,' he said. 'It would have to be a deliberate decision by policymakers to default on our debt. And I cannot imagine a worse decision than that one.'
Three times each week, Yahoo Finance Executive Editor Brian Sozzi fields insight-filled conversations and chats with the biggest names in business and markets on Opening Bid. You can find more episodes on our video hub or watch on your preferred streaming service.
Grace Williams is a writer for Yahoo Finance.