In this week’s episode of Retire in Texas, Darryl Lyons, CEO and Co-Founder of PAX Financial Group, breaks down the recent U.S. credit downgrade by Moody’s – and what it really means for the economy, the markets, and your personal finances. While headlines may spark panic, Darryl walks listeners through the facts with clarity and perspective.
From the ripple effect on mortgage rates to the role of active bond managers, Darryl explains why this downgrade, though historic, isn’t cause for alarm – and why the U.S. remains, in his words, “the cleanest shirt in a dirty load of laundry.”
Key highlights of the episode include:
- What the Moody’s downgrade means – and why it happened now.
- How it impacts stock and bond markets differently (and why the stock market already saw it coming).
- The connection between U.S. Treasury yields and rising mortgage rates.
- Why active bond management matters more in volatile conditions.
- The long-term perspective: why the U.S. is still the safest place for capital despite the headlines.
Whether you’re an investor, homeowner, or business owner, this episode offers a calm, candid take on a complex topic – helping you understand what really matters behind the noise.
For more insights or to connect with a PAX Financial Group advisor, visit http://www.PAXFinancialGroup.com.
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Transcript:
Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group, and you’re listening to Retire in Texas. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. And I love teaching you guys about money. I love doing it without using a lot of numbers, which is certainly unique.
And I hope you’re learning, and I hope you’re passing this along to others that are concerned, worried about money. So, I really get feedback from you guys on the content of the show. And then sometimes I do stuff that I like. Now, this is probably neither. I’m going to talk a little bit nerdiness with you, but I’m going to try to keep it lighthearted as much as possible.
But it has to do with a headline that I thought would be important for you to understand. And that’s Moody’s, this credit rating agency, downgraded the US credit. They use the rating Triple-A. It’s like a capital, AAA. And they downgraded it to AA1. And so, AAA was perfect. And now it’s no longer perfect. In fact, this is the first time since the 1910s that we have never had a perfect rating by at least one of the three credit rating agencies.
So, it’s a little bit of a historic event. There’re three credit rating agencies, and I’m going to share a little bit more about that, I’m going to share a little bit about how this impacts the stock market, the bond market, and your personal life. I think if I could manage your temperature, your emotion meter, I would like you to maybe join me in thinking like, this is really bad, and then I’m going to take you to a place that this is bad, and then I’m going to take you to a place that this isn’t so bad.
So that’s the kind of journey I’m going to take you on and just try to be candid with you. I can’t ever go that it’s good. But I think I can take you from a place where it’s really, really bad to it’s not so bad. So, let’s go. Let me give that a shot. So, the three credit rating agencies are Moody’s, S&P, and Fitch.
And they all kind of play different roles. They’re kind of like restaurant critics. And they all have kind of a different way of criticizing the restaurateur, I guess you could say Moody’s was, when they dropped the credit, from AAA to AA1. That was kind of like the last of the five-star reviews.
But think of them like the S&P is maybe the one that docks you for bad ambiance. Moody’s might judge your portion sizes, and then maybe Fitch might be the nerdy one that comes in with spreadsheets. So, they all have a different role, but basically none of them are saying we’re perfect anymore. Again, last time that happened was the 1910s, which is kind of an interesting thing because we went through the 30s and 50s, and so sometimes I scratch my head as a side and wonder about the credibility of these rating agencies.
But I’ll set that aside, maybe for another podcast. In the meantime, they have some weight and some heaviness in the marketplace. And so, I think we have to ask ourselves, like, why did they downgrade the US debt? And I know I may be stating the obvious, but, I mean, fiscal deficits, like we’re in a lot of debt.
I think we all know that, not only that, but political dysfunction. And then, you know, our cash flows aren’t matching, right? We have too much going out and not enough coming in. So, it’s just a kind of a concoction of how somebody as an individual gets themselves in a pickle with bad credit, and then what’s going to happen?
Your credit score is going to go down. So that’s basically what’s happened. I want to go to the stock market. How does the stock market react to something like this? Well, the stock market, I don’t think we give it enough credit. And I’ve been a student of the stock market for a long time. And I think when I talk to a lot of us in the marketplace, there’s this healthy skepticism that it’s a rigged game.
But I have got to tell you, it is a fascinating invention of humanity that is often not given enough credit for what it does to, transact or transfer capital, so people can buy beautiful homes, get an incredible education and start businesses. And for it to work and function, there’s not perfect, but it is highly intelligent in how it behaves and the stock market.
I say the stock market is the role it plays whenever things like this happen. It already knew it was going to happen. That is ultimately what I’m trying to say. It knew it a long time ago. So, when Moody’s does a downgrade and I get a phone call from a client saying they’re scared, I have to really stop and say, this is not a surprise.
The stock market has already factored in this downgrade. The stock market, what it doesn’t like is surprises. So, but this type of thing is just a matter of time. And so if you’re wondering how is the stock market, how did it react or how is it going to react to downgrade. It’s not that it doesn’t care.
It’s like we’ve moved on from that, that bond markets are just slightly different. What happens with something like this? As you would imagine, confidence in the United States drops just a notch. And Japan and China say, yeah, you’re not as good as you thought you were. And so, some people, I think of 3 different entities like China, Japan and even just the United States consumer as a whole, they start selling off some of these government bonds.
So that’s what I’m talking about. We often refer to them as treasuries. They start selling those off, and when they sell them off, the bond prices fall. And then we see yields rise. So that’s kind of how that framework works. But it’s basically a bunch of people saying you’re not as good as you thought you were. We’re going to start selling off.
And it does impact the bond market. So, there’s a little bit of a bond market problem that can occur and does occur. And frankly, it very well could cause and does cause the prices of the bonds to go down a bit. That’s why I really, when it comes to bonds, almost double click on the bonds for just a second.
I personally am not, if you’re younger, I say younger. I mean, I wouldn’t even say age, age is really irrelevant. It’s time horizon. If your time horizon is long, I don’t know why you would want bonds or, you know, maybe 5, maybe 10%. So not like a huge fan of owning bonds if you have a long-term time horizon.
But definitely, I know a lot of people who are, and we’re serving you guys, using bonds as a part of your portfolio. And a part of the way we think about bonds is the benefit of having an active manager navigate through some of these hiccups, because here’s what happens. The bonds will fall in that you currently have in your portfolio, and then a good manager will go and buy some of the better ones that just came out at a higher rate.
So now because rates have gone up, the yields have gone up. They’ll go in and get some good ones for you. So having an active manager is a good thing, in a kind of a volatile bond market. But the alternative you’ve heard me talk about this before is exchange traded funds that don’t actively manage those bonds.
And so, it’s very static. And so, my preference is if you’re going to own bonds to own, the active managers, especially in these times because, you know, there’s going to be deals out there and there’s going to be ways to kind of manage things. So that’s the stock market. Stock market doesn’t care. It’s like we already knew, bond market has a little disruption.
Maybe a tiny temper tantrum. I think maybe the bigger impact is the, it is the debt of all of us. There’s this huge, huge, huge, huge trickledown effect, like I said, Japan and China saying, yeah, we’re going to, we’ll buy your bonds. Now, keep in mind, when somebody says we’re buying your bonds to the United States, the United States has bonds.
That means they’re going to loan the United States money. And so, because the credit rating change, it’s going to cost more for the United States to service that debt. They’re going to have to pay a higher interest rate. And so, it’s Japan and China saying, and all the U.S. consumers of treasuries or investors of treasuries are saying, you want me to lend you money when you’re spending like crazy and can’t agree on a budget?
Cool. Fine. I’m going to charge you more interest. And that’s exactly what they’re doing. And so, the government has to pay more money to borrow. And that’s really a part of the bottom line here is the government has to pay more to borrow money. Okay. Pretty clear with some weird things that I might have said that are confusing that you’ll have to Google later.
But here’s where it gets interesting to me. Again, I think that the trickledown effect is important to understand. A lot of times when we talk about United States government bonds, many, many times we talk about something called a ten-year Treasury. And that’s if you lend the United States money, they’re going to pay you back in ten years.
And there’s a yield associated with that. Yield is kind of a tricky word. But in this context that yield, we’ll just call the interest rate some nuances to that. But so, let’s say that ten-year is 5%. So, here’s where it’s interesting. Most mortgages are connected. They’re connected directly to that ten-year. So, if we just saw that Moody’s downgrade caused the ten-year of the United States to trickle up, to go up just a little bit, then what did that do to mortgage rates across the country?
It also caused mortgages to go up across the country. Now when we talk about mortgages we’re talking oftentimes about a 30-year. So, here’s a number, I don’t want to use a lot of numbers. It’s the only time I’ll use numbers, if the ten-year is 5%. Mortgage rates on a 30-year loan are usually about one and a half to 2% higher than that ten-year.
So, if I just told you, follow me for just a second. If I just told you that the ten-year treasury is 5%, what are 30-year mortgages, now they’re bumping up to 7% because Moody’s said we’re not good, not good enough. So that’s a big deal. Why did they use it if it’s a 30-year mortgage, why do they reference the ten-year?
Okay, you might have not asked that question, but let me answer it because most people refinance or sell within ten years. So that’s the better proxy. So that’s kind of how that works. So anyways my big picture is that when the United States credit’s not doing as well as it should and Moody’s downgrades and Fitch and S&P all downgrade and we have to pay more as a government for our debt.
And of course, it becomes a problem, that trickles down to everyone that wants to buy a house. It’s going to cost more. That trickles down to municipalities and cities. It trickles down to counties and schools and businesses. And when somebody says, we don’t have money for that, it’s not just I mean, yes, it’s spending, but a lot of people are going to be paying more for their debt.
And so, to think that this Moody’s thing is, downgrade is just kind of a, you know, blip on the radar. No, it has some very significant indirect yet direct consequences to you and I. So specifically, I think for those in business that kind of this is where you got to be careful if you’ve overextended yourself with variable rate debt, which a lot of businesses have to do business that way, I get that.
didn’t really get that game so much 15 years ago or 20 years ago. I don’t believe that’s a necessary game to play for your mortgage, but I understand businesses do that. If you’ve overextended yourself, then and these rates start to go up, you could be in trouble. So that’s all the trickle down.
So, Moody’s says, as I guess a food critic says that your food’s no longer good. Your restaurant’s gone from five stars to four stars. That causes all the interest rates across the world to go up a little bit. And going up a little bit sounds like no big deal, but a little bit is a lot of money.
Okay, so have we been here before? I think that’s a question we’ve got to ask ourselves. So, Fitch, so we said Moody’s. Of course, Moody’s been around since like 1909. I don’t know how long the other one’s been around. But Fitch was downgraded in 2023. It downgraded the US debt in 2023. Kind of pushed through that. No big deal.
Obviously if you’ve seen what the stock market’s done in the last two years, that obviously wasn’t a big deal in 2011. We were fighting over the debt ceiling. And so, the S&P at that time, the other rating agency, the other food critic, they downgraded us then. And so, we’ve had downgrades before, and it honestly hasn’t really affected much.
I mean, obviously we’ve all had to pay more in debt. And the good news is, kind of good news, is those that are retiring, they’ll start to see a better yield in their bonds. So that’s always an attractive thing. But it does send this warning sign throughout the markets that makes everyone just a little nervous.
I think this is the bottom line. I want you to take away as I navigate what may be kind of a boring topic, but a very, very important one, despite what Moody’s says and despite what Fitch says and despite what S&P as rating agencies and food critics say, at the risk of doing back to back analogies, we are still the cleanest shirt in a dirty load of laundry.
And I mean, I don’t know how to express it. Of course I’m biased as an American, but if you look at the flow of dollars that are buying the US treasuries and they do this through auctions, the globe still feels measured through the purchases of United States treasuries, that we’re still the safest place. Now, we could watch those auctions and to see if there’s any concerns about that.
But people are still buying the United States government debt. Some of them are happier to get a higher yield. As you would imagine. But there’s not a second place. There’s just not, I mean, where are you going to go? You’re going to go to Canada, Mexico, England, I mean, the UK, China, Japan, I mean, so the United States, based upon the framework that we have, the economic machine that we have called the stock market and the bond market, the financial ecosystems, the innovation.
And, you know, the fact that I can start PAX Financial Group and not worry about the Chinese Communist Party coming in and saying, we own you. Now, I don’t have to worry about that. The fact that we have LLCs that protect us if we make mistakes and we don’t lose our entire life, like the degree of infrastructure that supports a thriving world, one where innovation can take place and people can create and thrive and have freedom.
It is far from perfect, but there isn’t a second place. And so, yes, I’m 100% committed. You’ve heard me say this before to fiscal responsibility. But when you see the Moody’s downgrade, just know, yes, it impacts all of us. But it’s not the end of the world. Thank you for listening today. And remember, you think different when you think long term. Have a great day.
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