Moody’s brought a lot of serious points up when it downgraded the credit ratings of the United States. Now the U.S. has no ‘AAA’ credit ratings from any of the three major ratings agencies. The list of problems was long, even if some market and political observers feel it was motivated. And in the end, it may actually not be the major event compared to the instant shock felt that weekend.
What has happened with the ongoing tariff news flow is that U.S. bond yields are remaining stubbornly high. And Federal Reserve Chairman Jerome Powell seems hell-bent on not lowering interest rates.
The United States is paying an exorbitant premium on its Treasury yields versus many other top nations around the world. In fact, the U.S. is being gouged — and Jerome Powell has shifted from a razor focus of being “data dependent” to “being concerned over supply shocks” that may keep inflation higher. This means that Powell has thrown out the data dependency (inflation rates have neared 2% again) in favor of trying to issue long-term economic weather forecasts through a submarine periscope.
Some economists are even arguing that the U.S. may need to raise interest rates again. It seems none of the financial models from economists are considering that the U.S. is reaching a point that it cannot afford these “higher for longer” rates — particularly if the deficit keeps rising. Just look at the U.S. spending chart from USAFacts to see the interest burden in plain sight.
Oggonomics has sourced global bond yields from the Wall Street Journal and Investing.com to see what the U.S. has to pay to service its debt versus other nations. Just looking at the spreads that the United States is having to pay versus other key nations almost feels like extortion. They can blame President Trump’s tariff moves all day long, but at the end of the day the financial math is just hard to fathom even when you add up everything that Moody’s sourced for its reason to downgrade the U.S. from ‘Aaa.’
It is going to feel as though a lot of key reasons for higher rates are being skipped over to get just to looking at the data. The loss of “American exceptionalism” is hard to overlook. More tax cuts, wider budget deficits, larger total government deficits ($36+ trillion and counting), political infighting, debt servicing costs ($1.1 trillion), percentage of mandatory budget spending, and many other issues cannot be ignored.
High bond yields also reflect the expectations that tariffs will rekindle inflation. The first quarter U.S. GDP reading was also negative due to surging imports overpowering the rest of the data. Current expectations are not looking for negative GDP to repeat, but that still has another 5 to 7 weeks of economic data to absorb before the real GDP estimates can be tallied.
One ongoing measurement of broader economic health is the spread between the 2-year Treasury note and the 10-year Treasury note. The reason is fairly simple to explain — the 2-year is one of the key barometers for the current economy as the median point of personal and business loans (1-5 years), and the 10-year rate is the basis for longer-term borrowings like mortgages. There is a healthy spread of 51 basis points on last look. It was not that long ago that the yield curve was inverted, signaling recession risks were nearly imminent.
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The United States is no longer looking at aggressive interest rate cuts in 2025 and this is keeping our Treasury yields much higher than the rest of the developed world. Europe has been cutting interest rates and China recently cut rates as part of its economic stimulus package.
Higher U.S. interest rates are creating higher loans for mortgages, autos, credit cards, business lines of credit, personal bank loans, and even student loans. By keeping short-term rates higher, Powell is also driving up U.S. borrowing costs because the debt servicing costs are so much higher than they used to be.
The CME Fed Fund Futures are showing the highest odds (39.0%) for 3.75-4.00% Fed Funds range by the end of 2025, but the odds (28.9%) of a 4-4.25% range are currently higher than the odds (21.0%) of s 3.5-3.76% range. This means that the market is putting real money odds that the U.S. is not likely to see aggressive rate cuts.
The European Central Bank (ECB) has already delivered a full 175 basis points worth of cuts to its deposit rate, which is currently at 2.25% (versus U.S. Fed Funds rate range of 4.25% to 4.50%). The ECB is expected to deliver yet another 25-basis point cut in the first week of June and that would take its overnight deposit rate down to 2.00% — a full 240-ish basis points lower than the U.S. The reasons — slowing inflation, wage dynamics and tariff concerns.
The list of problems with higher rates, nominally and relative to other nations, can go on and on. It won’t matter. The good news is that by May 16, 2026 Jerome Powell’s replacement for the Federal Reserve should be known and his or her confirmation should come very shortly thereafter. It’s safe to say that the next Chairman of the Federal Reserve will not be a rate hawk. Lowering short-term Fed Funds will give cover to bond investors to lock in higher yields for longer dated maturities as well (5, 10, 20, 30 years) — and more buying means lower yields.
It should not be expected that an interest rate cut from Jerome Powell would instantly fix the problem. That said, a series of cuts would go a long way in normalizing U.S. interest rates versus the rest of the world. This is likely going to be the role of whomever succeeds Jerome Powell in 2026.
Any discrepancy in spreads (below) not aligning to the exact basis points is due to rounding up or down to the closest basis point reading. Here are the rates (rounded) that the United States has to pay versus other major nations.
2-YR YIELD SPREADS
U.S. 3.98%
Australia 3.37% -61
Canada 2.66% -132
China 1.47% -251
France 1.95% -203
Germany 1.82% -216
Italy 2.06% -192
Japan 0.74% -323
Spain 1.99% -199
U.K. 4.08% +10
10-YR YIELD SPREADS
U.S. 4.49%
Australia 4.34% -14
Canada 3.30% -118
China 1.70% -279
France 3.23% -125
Germany 2.56% -192
Italy 3.54% -94
Japan 1.52% -297
Spain 3.16% -132
U.K. 4.73% +24
