There was a time when bad news about U.S. debt would send markets into a tailspin, but not this month. Markets on Monday shrugged at a warning Friday from Moody's Investor's Service that it was lowering its ratings outlook on Treasurys. The big-three ratings agency said high levels of government debt and deficits coupled with political brinkmanship in Washington could jeopardize the global standing of government-issued fixed income.

Moody's is the only one of the big-three agencies that still has a triple-A rating on U.S. debt; Fitch lowered its rating in August, and S&P made its move 12 years ago. Despite its warning, the service is the only one of the big-three agencies that still has a triple-A rating on U.S. debt.

The Moody's news merely echoes the well-known issues of the $33.7 trillion U.S. debt and the $1.7 trillion deficit in fiscal 2023. Both are concerns that Wall Street wrestles with daily. However, the ratings service's saber-rattling just doesn't seem to have the same impact as previous warnings from Standard & Poor's and Fitch. "If we go from triple-A to double-A, what does that practically mean? It doesn't really mean anything. There's still going to be demand for U.S. Treasurys en masse," said Michael Reynolds, vice president of investment strategy at Glenmede Investment Management.

While the Friday announcement by Moody's did not significantly impact the markets, earlier in the week, weak auctions of 10- and 30-year Treasury bonds raised concerns among investors about the long-term ability of the government to pay its bills. Furthermore, the Treasury Department reported a deficit of over $66.5 billion for October 2023, the first month of the 2024 fiscal year. These developments highlight the ongoing fiscal challenges faced by the U.S. government.

Despite these concerns, major stock market indexes posted muted gains on Monday, and yields on long-dated Treasurys rose slightly. Glenmede Investment Management, for instance, is currently overweight cash and is considering opportunities to invest in longer-dated Treasurys, anticipating a possible recession in the U.S. that may lower yields and make longer-duration bonds more attractive.

However, there is still skepticism surrounding bonds, particularly if inflation remains elevated and the Federal Reserve maintains high benchmark interest rates. Last week, Fed Chair Jerome Powell's reminder of the central bank's commitment to fighting inflation and the potential for further rate hikes rattled the markets.

Investors will be closely watching this week's data, which will include inflation reports on consumer and producer prices, to gain greater insight into the demand and potential direction of interest rates. Retail investors have been betting on falling rates, as evidenced by the $42.2 billion iShares 20+ Year Treasury Bond ETF receiving $831.6 billion in fresh cash in November, according to FactSet.

Overall, while Moody's warning may not have had a significant impact on the markets, it serves as a reminder of the ongoing challenges and uncertainties surrounding U.S. debt and fiscal policy. Investors will continue to monitor developments and data in the coming weeks to assess the potential implications for fixed income markets and the broader economy.