Last month, Moody’s, one of the ‘big three’ credit rating agencies, downgraded the United States’ sovereign credit rating to Aa1. While still considered high quality, this is one notch below the top-tier Aaa rating.

There was a quiet response in the bond market because this follows similar downgrades by Standard & Poor’s in 2011 and Fitch in 2023 from AAA to AA+ (same definitions as Aaa and Aa1). All three rating services are now at AA+ equivalent, the lowest rating ever for U.S. debt.

There are only two corporations in the U.S. with a AAA rating across the three agencies Microsoft and Johnson & Johnson.

Internationally, very few corporations have ever held AAA ratings, and even fewer held them across all agencies. Notable past examples of those that have held one or more AAA ratings include Nestlé (Switzerland), Allianz (Germany), and Toyota (Japan), though none of these companies retain AAA ratings today.

There are several countries with AAA bond ratings. Note that the United States has a larger population and an economy twice the size of all these countries added together.

• Australia
• Liechtenstein
• Singapore
• Canada
• Luxembourg
• Sweden
• Denmark
• Netherlands
• Switzerland
• Germany
• Norway

In contrast to the limited number of companies and countries with top-tier credit ratings, approximately 24% of American adults with a credit history have a top-tier credit score  800 or higher. This equates to at least 50 million Americans.

Last month’s downgrade wasn’t a shock, but it was a warning. The risk of non-payment of interest or principal is virtually zero. The risk is that deficits and interest costs will crowd out funding for both government and private programs. The same principle applies to companies the more they spend on debt service, the less they can reinvest in growth or return to shareholders. This is why we invest in companies that manage their debt prudently, just like the millions of Americans who maintain exceptional credit scores.

The other great risk is inflation  often the byproduct of governments printing money to cover their burdens. Equities perform better than bonds in an inflationary climate. We are in an inflationary period.

What does this mean to you? Be mindful of your bond exposure, just as we are in your portfolio. We aim to keep it relatively low and short-term, while we continue to invest in the companies keeping their house in order.