Moody’s Investors Service has raised concerns about the U.S. triple-A sovereign rating, citing rising interest rates and doubts regarding effective fiscal policies.
The rating agency announced a negative outlook revision on Friday, implying a potential downgrade in the future. Currently, Moody’s is the sole major agency that maintains a triple-A rating for the U.S., as S&P Global Ratings and Fitch have already downgraded it to AA+.
Although several other nations still enjoy a triple-A rating, investors seeking AAA-rated U.S. debt have two viable options: Johnson & Johnson (JNJ) and Microsoft Corp. (MSFT).
According to FactSet data, Microsoft holds approximately $51 billion of outstanding bonds and has access to $144 billion in liquidity. On the other hand, J&J possesses about $29.5 billion worth of bonds and has access to $33.5 billion in liquidity.
Notably, both companies capitalized on the zero-interest rate environment before and during the pandemic by extending their bond maturities, as depicted in these charts from BondCliQ Media Services.
Among the maturity buckets, the 30-year segment is the largest for both issuers.
Over the past two weeks, there has been a decrease in demand for Microsoft bonds, while J&J bonds have experienced increased buying activity.
Spreads Tighten for J&J and Microsoft Bonds Amid Sovereign Downgrade Concerns
The spreads for two of J&J and Microsoft’s most active 10-year bonds have significantly tightened over the past month when compared to yields of Treasury notes with similar maturities.
Potential Impact of U.S. Sovereign Downgrade
With concerns about a potential downgrade of the U.S. sovereign, one might wonder if J&J and Microsoft would also face downgrades. However, according to Glenn Reynolds, founder and editor of Macro4Micro, and founder and former CEO of research firm CreditSights, there is no reason to believe that J&J and Microsoft would be downgraded unless agencies do not allow corporates to have higher ratings than the sovereign.
Stand-Alone Fundamentals at Play
Reynolds argues that a downgrade for J&J and Microsoft would only be warranted if the agencies have changed their view on the stand-alone fundamentals of these companies. He emphasizes that if the sovereign ceiling downgrade were a strict rule, it would not require extensive meetings or discussion on underlying variables, as the agencies tend to enjoy attracting attention. Reynolds suggests that if it is indeed a hard and fast rule, the agencies should straightforwardly communicate it.
Moody’s, the rating agency in question, has not yet responded to requests for comment.
On Monday, J&J’s stock experienced a slight decline and has lost 18% since the beginning of the year. In contrast, Microsoft’s stock was down 0.3% but has gained an impressive 53% year-to-date.
During this period, the Dow Jones Industrial Average (DJIA) has seen a 3.4% increase, while the S&P 500 (SPX) has gained 15%.