Hello, YieldAlley readers! In this issue:

👨‍💻 OpenAI's Big Bet That Jony Ive Can Make AI Hardware Work (Wired)

⏱️ What’s Next for High-Yield Bond Funds? (Morningstar)

🏪 Walmart plans job cuts in restructuring push to simplify operations (CNBC)

7️⃣ 7 Attributes of The Millionaire Next Door (A Wealth of Common Sense)

🇺🇸 How much exposure to US stocks is too much? (Financial Times)

Following Moody's recent downgrade of U.S. Treasuries from AAA to AA1 (equivalent to AA+), headlines screamed about the "sell America trade" as 30-year Treasury yields spiked above 5%. Yet within 12 hours, those same yields had retreated below 5%, suggesting the market's initial panic was overblown. Despite losing their final AAA rating from the major credit agencies, U.S. Treasuries continue to represent the world's safest and most liquid investment, a conclusion that becomes clearer when you examine the data behind the ratings.

The Moody's downgrade means Treasuries now carry AA+ or equivalent ratings from all three major agencies: Standard & Poor's, Moody's, and Fitch. While this represents a technical reduction in safety, AA+ remains these agencies' second-highest rating. More importantly, the rating agencies apply stricter standards to public sector issuers like the U.S. government than they do to private corporations, making direct comparisons misleading.

Historical default data from Standard & Poor's reveals this disparity clearly. Over a 14-year period, AA-rated public finance issuers (including the U.S.) have experienced a default rate of just 0.04%, that's 4 chances in 10,000. Compare this to AAA-rated corporate bonds, which carry a 1.01% default rate over the same timeframe, or AA-rated corporate bonds at 1.26%. Even with their downgraded rating, Treasuries statistically remain safer than the highest-rated corporate debt.

The logic behind this difference is straightforward: when private corporations face financial distress, creditors, customers, and employees can simply walk away. Governments, however, retain the power to raise taxes and cannot see their populations disappear overnight. As one investor noted, "If T-bills are no good, none of your money is any good."

Beyond safety, Treasuries maintain their position as the world's most liquid investment. In the first quarter of 2025, U.S. Treasuries accounted for $1.048 trillion in average daily trading volume, representing 70% of all bond trading in the United States. Corporate bonds, by contrast, managed just $60.9 billion in daily volume.

This liquidity advantage becomes crucial during market stress. While AAA-rated municipal bonds and foreign sovereign debt technically carry higher ratings, many of these securities trade infrequently or in small lots, potentially leaving investors unable to exit positions when needed. The market's empty circles and "insufficient data" indicators for many supposedly safer alternatives underscore this liquidity challenge.

For investors determined to hold AAA-rated bonds, two primary options exist within the public finance sector, where default rates remain historically lower than corporate equivalents.

AAA-Rated Municipal Bonds represent the first alternative. Thousands of municipal issues carry dual AAA ratings from both S&P and Moody's, offering tax advantages for high-income investors. However, these benefits come with significant caveats. Most munis are tax-exempt, requiring investors to be in the highest marginal tax brackets to maximize benefits. Additionally, municipal bonds typically suffer from poor liquidity, and a hypothetical U.S. default would likely impact municipal issuers as well.

Foreign Government and Supranational Bonds provide the second option. Entities like the European Investment Bank or Germany's KfW (which carries an explicit government guarantee) offer AAA-rated debt denominated in U.S. dollars, eliminating currency risk while potentially providing some insulation from domestic U.S. economic troubles. However, these bonds also trade infrequently, and brokerage platforms show limited market data for most offerings.

Only two U.S. corporations, Microsoft and Johnson & Johnson, retain dual AAA ratings from major agencies, but their corporate status subjects them to higher default probabilities than public sector issuers.

The market's swift reversal after the initial downgrade panic suggests many professional investors view the rating change as largely symbolic. Community discussion reveals a range of approaches, from those continuing to ladder Treasury bills with auto-roll features to others seeking opportunities in longer-duration securities when yields spike.

Several investors emphasized the tax advantages of Treasuries, noting that interest earned remains exempt from state and local taxes when held in taxable accounts. Others pointed to the broader economic context, arguing that rising federal debt and persistent deficits represent the real long-term concerns rather than immediate default risk.

One perspective gaining traction focuses on inflation rather than default as the primary Treasury risk. With the Federal Reserve potentially facing renewed inflationary pressures and the government's interest burden already exceeding military spending, some investors worry about currency debasement rather than outright default.

Despite the technical downgrade, several fundamental factors support Treasuries' continued dominance. The United States hosts the world's most valuable companies, operates the most powerful financial markets, and maintains the global reserve currency. While no empire lasts forever, these advantages appear likely to persist for the foreseeable future.

The brief nature of the "sell America trade" following the downgrade suggests markets recognize this reality. Professional money managers continue auto-rolling Treasury ladder strategies and parking excess cash in government money market funds, indicating institutional confidence remains intact.

For most investors, the Moody's downgrade changes little about Treasuries' role in diversified portfolios. They continue offering unmatched liquidity combined with minimal default risk, backed by the full faith and credit of the world's largest economy. The statistical safety advantage over corporate alternatives, even highly-rated ones, supports maintaining Treasury positions for conservative portfolio allocations.

Investors specifically seeking AAA-rated exposure might consider small allocations to municipal bonds (if in appropriate tax brackets) or foreign government debt, but these should complement rather than replace Treasury holdings due to liquidity limitations.

The downgrade serves more as a reminder to focus on underlying economic fundamentals rather than rating agency pronouncements. With Treasury yields offering attractive real returns and maintaining their liquidity advantages, the case for Treasuries remains compelling despite their technically diminished rating status.

As market volatility continues around tariff policies and inflation concerns, Treasuries' combination of safety, liquidity, and government backing keeps them at the center of conservative investment strategies. The rating agencies may have spoken, but the market's quick return to Treasury buying suggests investors recognize where true safety still resides.

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

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