This post was authored by Adem Tumerkan, Dunham's Content Writer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.
  • With its cut to Aa1, all three major agencies have now downgraded U.S. debt, officially ending the illusion of top-tier credit — and reinforcing concerns about America’s long-term fiscal health.   

  • With $36T in debt, rising interest costs, and trillion-dollar deficits during economic growth, the U.S. faces shrinking flexibility in future crises — and potentially higher borrowing costs across the board.

What you need to know: Moody’s Ratings has downgraded the U.S. credit rating from Aaa to Aa1, pointing to rising debt and persistent deficits that could undermine the country’s appeal to global investors and drive up borrowing costs1. 

Why it matters: Moody’s recent downgrade of the U.S. credit rating — the last of the major agencies to do so — serves as a stark reminder that America's rising debt and ongoing deficits carry real-world consequences. While the downgrade’s immediate market impact may be limited, it signals that the era of unlimited, low-cost borrowing may be over. As fiscal strain grows, U.S. policymakers could face less flexibility in future crises — and borrowing costs across the economy, from mortgages to auto loans, may eventually feel the ripple effect.

Now the Deep Dive: Well, it’s official. All three major credit rating agencies — Fitch, Moody’s, and S&P Global — have now downgraded U.S. debt.

Moody’s was the final holdout, but on May 16, they finally cut the U.S. credit rating from Aaa to Aa1. It’s a headline-grabber, for sure. But here’s the thing: the U.S. technically lost its “pristine” AAA rating years ago.

Let me explain. . .

S&P — the largest and arguably most influential rating agency — downgraded the U.S. way back in August 2011 amid political dysfunction and an unsustainable fiscal outlook.

That lit the fuse.

Fast forward to August 2023, and Fitch followed suit, dropping their rating to AA+ over similar concerns.

From then on, the U.S. became “split-rated” — two of the three agencies no longer considered U.S. debt AAA. But because Moody’s held out, some still clung to the illusion of top-tier creditworthiness.

Now that Moody’s has caught up, it’s more of a symbolic alignment than a new development.

For instance, index providers like Bloomberg already reflected this “AA+ reality” back in 2023. So from a market-pricing standpoint, not much has changed (see chart below).

But here’s what does matter — and why this isn’t just noise:

So yes, Moody’s downgrade is worth noting — not because it’s new, but because it closes the chapter on a drawn-out story on America’s fiscal reality. It may also help keep long-end U.S. interest rates elevated (this week’s weak demand at the 20-year Treasury auction shows the market’s growing discomfort with long-term U.S. debt).

But I have to say, the U.S. fiscal story hasn’t been “good” in a long time. First it was $15 trillion in debt. Then $20T. Then $25T. Then $30T. Now it’s over $36T. What exactly made that the tipping point?

It’s like watching a slow-motion car crash — we’ve seen it coming for miles, but only now are we concerned and reacting to the sound of metal crunching?

Either way, we’re now firmly in the AA+ era.

I'll be watching how markets — and policymakers — move from here.

 Figure 1: Bianco Research, May 2025


When Liquidity Evaporates: Inside Japan’s Quiet Bond Crisis 

  • Japan’s bond market is under mounting stress as rising yields, weakening domestic demand, and the Bank of Japan’s retreat from bond purchases expose deep structural vulnerabilities.

  • With Japan holding trillions in foreign assets, continued instability in its debt market could trigger global ripple effects through capital outflows and forced asset sales.

What you need to know: Japanese government bonds took another hit after a debt auction saw the weakest demand in more than a decade. Yields surged across long-dated maturities — including 20-, 30-, and 40-year bonds — as investor appetite continued to fade. 

Why it matters: The surge in yields underscores deepening structural challenges in Japan’s bond market — from growing concerns over rising government spending to the Bank of Japan’s retreat from regular bond-buying (which helped keep yields suppressed). Now, with key domestic players like life insurers staying on the sidelines, the gap in demand is becoming harder to ignore. 

Now the Deep Dive: For decades, Japan’s bond market was in a deep freeze. Near-zero -and even negative - rates were the norm.

Why? Well, a busted housing bubble in the '90s, anchored deflation (falling prices), an aging population (that’s shrinking), and an anemic consumer all played roles.

Because of this, the Japanese government ran huge deficits to try and stimulate the economy (remember, in economic orthodoxy, if the private economy is collapsing, governments often run deficits to try and pump money in and keep things from falling further).

Thus, to fund all this government debt, the Bank of Japan soaked up bonds like a sponge, buying en masse to keep yields pinned down.

It’s gotten so bad that by 2024, government debt hit around 260% of GDP — the highest in the developed world. Only Sudan has more debt as a share of GDP, but it’s essentially a failed state. Japan is a G7 economy. Big difference.

This went on for many years, but then came COVID. . .

A new era of stimulus spending, supply shocks, and Inflation hit. And the BOJ was forced to back off – meaning it had to let yields rise.

But that’s a problem when you're sitting on a mountain of cheap debt.

Now Japan’s bond market is twitching — or maybe seizing? Liquidity has dropped to levels not seen since the Lehman collapse.

  • Or said another way, getting out of long-dated Japanese bonds has gotten difficult as sellers can’t find buyers at the prices they want.

if you listen close, you can almost hear it — the sponge soaking up every last drop of liquidity.

Yields on 30- and 40-year Japanese government bonds (JGBs) are making new highs. The curve is bear steepening — aka long-term yields rising faster than short-term ones.

Keep in mind this will likely have global ripple effects since Japan is the world’s largest net creditor. Its investors hold trillions in foreign assets. If domestic losses pile up, they might start selling overseas holdings to raise money. And that could rattle global markets.

Even more worrying is that inflation expectations in Japan are becoming unanchored – meaning they’ve stayed high, and they’re creeping up again. If inflation really breaks out, the BOJ will have no choice but to push rates higher — and the debt overhang becomes even more dangerous.

Keep this in mind – what happens in Japan’s bond market may become a global affair. 

Figure 2: Bloomberg, May 2025 

 

When the Cure Becomes the Sickness? Inside Turkey’s Corporate Squeeze

  • Half of Turkish companies posted Q1 losses, as soaring borrowing costs and policy reversals squeeze the private sector and signal deeper economic strain. 

  • With interest rates above 46% and commercial debt costs topping 60%, Turkey's inflation fight is now wiping out corporate earnings, employment, and long-term stability in a geopolitically vital nation. 

What you need to know: Half of Turkish firms are bleeding. In Q1, 269 of 539 companies reported net losses — crushed by soaring borrowing costs and rising fears of a hard landing5. 

Why it matters: Turkey’s been struggling with brutal inflation for years — peaking above 85% in 2022 and still hovering over 37% as of last month. To tame it, the central bank has pushed interest rates up to 46%. And it helped with inflation cooling — but not fast enough. Now, the high rates are squeezing businesses and borrowers hard and raising the risk of a deeper crisis in a strategically vital economy. 

Now the Deep Dive: I found this Q1 data on Turkish firms telling. It shows how higher interest rates, stretched over time, can quietly choke an economy — especially once growth slows and momentum fades.

Turkey has been running one of the tightest monetary regimes in the world – and that pressure was expected to ease. But in March - after political shocks - the central bank killed that notion via shelving rate cuts and instead raising rates.

Now Turkish firms are stuck refinancing short-term debt at commercial rates above 60%. That’s unsustainable for many — and it’s showing up in the numbers. Profit margins are getting crushed, not because revenue is exactly plunging, but because debt servicing is rising faster.

Yet, ironically, much of the private sector supported the rate hikes at first. Inflation had nearly doubled in 2022 alone (just imagine an 85% inflation rate), and something had to be done to stabilize the currency.

  • Higher rates work by making borrowing more expensive = slowing spending = cooling demand = lower prices. That’s how you often fight inflation.

But there’s no free lunch in economics. The cost always shows up somewhere. And right now, it’s showing up in Turkish earnings.

In fact, some of the country’s largest firms are preparing for layoffs and cutting back spending.

Now you may be wondering, “So why should we care about Turkey?” (aka Turkiye).

That’s a fair question. Turkey’s economy is roughly $1.5 trillion — not big at all on the global stage. But it’s not just about the size of the economy. It’s about where it is and what role it plays.

  • Turkey has the second-largest military in NATO, behind only the U.S., and serves as a key security partner. The Incirlik Air Base is critical for NATO and U.S. operations throughout the Middle East.

  • Geographically, Turkey sits at the intersection of Europe, Asia, and the Middle East. It controls the Bosporus Strait — the narrow waterway connecting the Black Sea to global trade routes. That gives it a central role in energy/trade flows and regional diplomacy - especially in checking Russian naval movement.

  • It’s also a demographic force. With a population of more than 85 million, Turkey would be the second-most populous country in the EU, just behind Germany and ahead of France. It’s a young, growing population, which means the long-term upside is there.

So, while Turkey’s problems may look local, they can have global ripples. A crisis there won’t just move markets — it could rattle the geopolitical order.

Keep this in mind. 

Figure 3: Bloomberg, May 2025

Anyway, who knows what will happen?

This is just some food for thought as we watch how these trends develop.

As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.

Sources:

    1. Moody's credit rating drop: The message behind the decisionFinancial Stability Report—2025 - Bank of Canada
    2. Deficit Tracker | Bipartisan Policy Center
    3. Japan net external assets hit record high in 2023, remains world's top creditor | Reuters
    4. Japan’s Nippon Life Insurance Says Unrealized Bond Losses Tripled - Bloomberg
    5. Half of Turkish Firms in Red as Tight Monetary Policy Bites - Bloomberg

Disclosures:

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.

Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.

Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.

SUBSCRIBE TO
THE DUNHAM BLOG