The U.S. may face credit assessment implications if the looming government shutdown happens, warns the credit rating giant Moody’s.

A government shutdown, if it materialized, would shine a spotlight on the vulnerabilities in U.S. institutional and governance strength when compared to other top-rated governments.

Last week, the Federal Reserve’s announcement of its steadfast commitment to keep higher interest rates for longer ignited a substantial surge in Treasury bond yields. Now, the looming specter of a government shutdown has added fuel to the fire in the U.S. bond market.

The 10-year yield surpassed 4.5%, and the 30-year bond yield exceeded 4.6% on Monday. Bond-related assets experienced sharp selloffs, with the iShares 20+ Year Treasury Bond ETF (NYSE:TLT) down more than 2% decline on Monday, on track for its fifth consecutive week of losses.

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US Government Shutdown Has Credit Implications

“A shutdown would be credit negative for the U.S. sovereign,” Moody’s stated in a note.

As reported by Reuters on Monday, Moody’s issued a warning that a possible government shutdown would expose the fragility of U.S. institutional and governance structures compared to other top-rated governments.

Due to disagreements within the Republican Party, Congress has not yet ratified any spending bills to finance federal agency programs for the fiscal year that starts on Oct. 1.

The agency, which currently maintained a triple-A rating for the U.S. government, emphasized it would underscore the constraints that political polarization imposed on fiscal policymaking.

This came at a time when fiscal strength is on the decline due to widening fiscal deficits and deteriorating debt affordability.

Economic Impact: Short-Lived but Potentially Severe

While Moody’s suggested the economic impact of a government shutdown would likely be short-lived, it warned the longer it persisted, the more severe the consequences could be for the broader economy.

The most immediate impact would be felt through reduced government spending.

Moody’s cautioned an extended shutdown could disrupt both the U.S. economy and financial markets.

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