Markets have largely shrugged off previous government shutdowns, but this time could prove different if it shows U.S. government ineptitude has fallen to a new low. That could cause rating agencies to reexamine the high, but fragile condition of U.S. credit worthiness. On Monday the Labor Department said it’s preparing a contingency plan for what would amount to a news and data blackout should the U.S. government suspend operations, showing the Trump Administration is preparing for the worst. Moody’s in May downgraded its credit rating for the U.S. to Aa1 from the highest possible Aaa level. At the time, Moody’s warned that political matters could drive further rating cuts if they have serious economic repercussions. “The rating also could be downgraded if policy effectiveness or the strength of institutions were to erode to such a degree that materially weakens the sovereign’s credit profile,” Moody’s wrote. The agency said such cases would include “a deterioration in medium-term growth or economic resilience to shocks” or significant moves out of the U.S. dollar. A possible move on the U.S. credit rating led JPMorgan’s trading desk to warn clients Monday morning of a “tail risk” if the government shuts down this week. Another cut to the credit rating as a result of a shutdown would likely hurt U.S. Treasurys and send yields higher, in turn weighing on stocks by raising companies’ cost of capital and reducing the future value of earnings. ‘Never ending fiscal follies’ President Donald Trump is convening top Congressional leaders to strike a deal before the Wednesday deadline. He has warned of mass firings of federal employees in the event of a shutdown, which can also make this shutdown look different than those in the past. Data from recent history shows that markets have typically brushed off government shutdowns. Some market participants were already wondering if a government shutdown could look different this time around because of the fractured political climate and national economy’s health. US10Y YTD mountain The 10-year Treasury, year to date For now, bond traders and economists don’t seem overly worried about the risk, but it is on their radar. Chris Rupkey, chief economist at FWDBONDS, said a downgrade would be more like a “technicality” for the Treasury market, which has already shown resilience in the wake of prior cuts and concerns about the national debt. Bond traders also expect Treasury Secretary Scott Bessent to “step in” if anything goes majorly awry, he said. Additionally, RSM Chief Economist Joe Brusuelas said a credit rating downgrade isn’t a likely outcome to begin with. On the other hand, he said one can expect a decrease in hiring and business investment in the U.S. if a shutdown isn’t quickly resolved. “My sense is that market risk around another government shutdown is minimal,” Brusuelas said. “Market participants have been conditioned to the never ending fiscal follies in Washington.”
https://www.cnbc.com/2025/09/29/a-possible-risk-to-markets-from-a-shutdown-getting-chatter-on-trading-floors.html
