US credit rating downgrade in 2026?

Both Moody's and S&P will assess the Q4 2025 legislative outcome. They will evaluate the Tax Cuts and Jobs Act (TCJA) provisions through their established frameworks for "governance effectiveness" and "institutional strength." Their assessments will focus on policy predictability, fiscal sustainability, and the ability of political institutions to reach consensus [1, p. 10], [3, p. 7]. Both agencies are concerned about the legislative outcome's impact on the U.S. fiscal trajectory and any evidence of political polarization affecting policy decisions [2, p. 3], ^[3].

Moody's evaluates governance effectiveness through policy predictability and political cohesion. It assesses "governance effectiveness" as a component of "institutional strength," examining factors such as policy predictability, the capacity to formulate and implement effective policies, and political cohesion [1, p. 10]. Moody's has previously noted political polarization and the resulting difficulty in achieving bipartisan consensus on fiscal matters as a credit challenge for the U.S. [2, p. 3]. Following the Q4 2025 legislative outcome, Moody's would likely use language emphasizing the "effectiveness of fiscal policy decision-making" and "policy predictability." Should the outcome lead to further deterioration of the fiscal outlook or continued political gridlock, Moody's could reference the U.S. "fiscal strength on course for continued decline" ^[4] and challenges in the "ability to address fiscal challenges" [1, p. 10], reflecting negatively on governance effectiveness.

S&P Global Ratings focuses on policymaking effectiveness and political stability. It considers the "effectiveness of policymaking, political institutions, and the degree of political stability" a core component of its sovereign ratings, which includes evaluating "policy predictability, transparency, and accountability" [3, p. 7]. S&P has expressed concerns about the U.S.'s "high and rising fiscal deficits" and the impact of political dynamics on policy decisions, particularly regarding consensus-building to manage the debt burden ^[3]. After the Q4 2025 legislative resolution, S&P's commentary would likely focus on the outcome's effect on the U.S.'s "fiscal trajectory" and whether it demonstrates the capacity for "timely and effective policy responses" to address long-term fiscal imbalances ^[3]. An inability to reach a sustainable resolution, or one that exacerbates fiscal pressures, would likely be cited as an example of political institutions struggling to achieve "consensus" on critical policy decisions, thereby impacting the assessment of policymaking effectiveness and political stability ^[3].

Future US Treasury holdings data is not yet available. The U.S. Treasury's Treasury International Capital (TIC) data provides historical records of international capital flows and holdings, rather than future projections. Consequently, specific year-over-year rates of change for US Treasury securities held by foreign official institutions for late 2025 or early 2026 are not yet accessible ^[2]. As of February 2024, the latest available data, foreign official institutions held $4,082.9 billion in US Treasury securities ^[1].

Foreign official holdings are significantly higher than pre-downgrade levels. Prior to the August 1, 2023, Fitch downgrade, foreign official institutions held $4,013.9 billion in US Treasury securities in July 2023 ^[1]. Immediately following the downgrade, holdings saw a slight decrease to $3,993.4 billion in August 2023 ^[1]. The February 2024 figure of $4,082.9 billion represents an approximate 4.90% year-over-year increase from February 2023. This current level is notably higher than those observed both before and immediately after the 2023 Fitch downgrade ^[1].

By mid-2026, federal debt-to-GDP ratio is projected to exceed 120%. The Congressional Budget Office (CBO)'s 10-year budget outlook is projected to show federal debt reaching 175% of Gross Domestic Product (GDP) by that time ^[1]. This specific forecast, anticipated around March 2, 2026, confirms that the debt-to-GDP ratio will significantly surpass the 120% threshold ^[1].

This projection is part of CBO's comprehensive budget and economic outlook. It is a core component of the CBO's broader budget and economic outlook, which offers a detailed analysis for the decade spanning 2026 to 2036 ^[2]. The updated figures are sourced from the CBO's February 2026 Budget and Economic Outlook ^[3]. The Committee for a Responsible Federal Budget (CRFB) specifically drew attention to this 175% of GDP projection from the CBO's long-term outlook in early March 2026, emphasizing the anticipated increase in the nation's debt burden ^[1].

Research indicates no evidence of significant CDS spread widening or fiscal contagion in late 2025. There is no direct evidence to support a widening of credit default swap (CDS) spreads on general obligation bonds for Illinois, New Jersey, and Kentucky by more than 75 basis points in late 2025. Furthermore, the available information does not suggest a state-level fiscal contagion risk originating from these states. The research does not provide specific forecasts or data regarding CDS spreads for these states, nor does it discuss the magnitude of potential widening in late 2025.

Illinois and New Jersey exhibit stable or improving credit outlooks despite pension debt. Despite Illinois and New Jersey being identified among states with significant per capita pension debt ^[5], their bond rating outlooks for 2025 indicate stability or improvement in their credit standing. Fitch Ratings assigned an 'A' rating with a stable outlook for Illinois' $1.7 billion general obligation bonds as of July 29, 2025 ^[1]. Similarly, KBRA revised its outlook to positive for New Jersey's general obligation bonds and related state appropriation credits ^[2].

Kentucky faces fiscal challenges without specific CDS or rating projections to indicate a widening. While Kentucky faces fiscal challenges, evidenced by budget pressures and downward revenue revisions for fiscal year 2026 ^[3], ^[4], the research does not offer specific bond rating outlooks or CDS spread projections for the state that would support a significant widening in late 2025. There is no information suggesting a state-level fiscal contagion risk developing from these states within the provided sources.

No major agency issued a formal 'negative credit watch' for 2025 political brinkmanship. While credit rating agencies expressed concerns about the U.S. fiscal situation and governance, their actions or statements did not meet the criteria for a formal negative watch specifically tied to political brinkmanship during the 2025 debt ceiling negotiations. Fitch Ratings, which had previously downgraded the U.S. in August 2023, warned in January 2025 that a debt ceiling stalemate remained a risk despite a Republican-controlled government ^[1]. This constituted a warning rather than a formal 'negative credit watch' announcement for 2025.

Moody's maintained a 'negative outlook' on the U.S. due to fiscal concerns. Moody's Investors Service maintained its 'negative outlook' on the U.S. Aaa rating as of March 2025, indicating a potential for a downgrade over the next 12-18 months. Their concerns centered on the U.S.'s fiscal strength, which they believe is on course for continued decline due to very large fiscal deficits and deteriorating debt affordability ^[2]. This 'negative outlook' is a distinct action from a short-term 'negative credit watch' specifically tied to political brinkmanship.

S&P maintained a 'stable outlook' on the U.S. sovereign credit rating. S&P Global Ratings maintained this 'stable outlook' as of April 2025 ^[3]. This assessment suggests that S&P does not anticipate a rating change within the next two years, indicating a more stable near-term view compared to the other agencies' cautionary statements regarding future fiscal risks.