U.S. credit cut could raise borrowing costs for Long Island

Long Islanders seeking to borrow money to buy homes and cars could likely see their costs increase after the U.S. government's credit rating was downgraded last week.

On Friday, Moody’s Ratings became the last of the three major credit-rating agencies to downgrade the U.S.’ credit rating to “Aa1” from its long held top-tier status of “Aaa," The Associated Press reported. The downgrade warns investors not to lend to the United States government at low interest rates as the country is now seen as a slightly riskier borrower.

As a result, U.S. stocks, bonds and the value of the U.S. dollar drifted lower earlier Monday.

But by day's end, the Dow Jones Industrial Average inched back up 0.32% at market close. The S&P 500, which was down 0.9% in early morning ended the day up 0.088%.

Also, the yield on the 10-year Treasury note — one of the country’s main ways of borrowing money — jumped to 4.53% from 4.43% late Friday. That number shows how much in interest the U.S. government has to pay to borrow money for 10 years. The yield closed up at 4.45% Monday.

The U.S. credit rating downgrade also could potentially impact Nassau and Suffolk counties' budgets and residents' loans if interest rates continue to rise, said Mitchell O. Goldberg, president of Melville-based financial advisory firm ClientFirst Strategy Inc.

Here are three things to know about the country’s downgraded credit rating and its impact on Treasury notes.

What is the 10-year Treasury note?

Goldberg said it’s important to understand that the United States has two primary ways of raising the money to pay its debts.

“One is from tax receipts, so when you pay federal taxes, that money goes to the U.S. Treasury,” he said. “If it doesn’t have enough money coming through taxes, the U.S. government will borrow money from investors.”

That’s where debt vehicles like the 10-year Treasury note come in, Goldberg said.

Essentially, 10-year Treasury notes are “I.O.U.s” the United States gives to investors in exchange for funding, Goldberg said. Over that 10-year period, investors receive interest payments from their loan every six months, and at the end of the decade, an investor gets the initial principal payment back.

What does it mean when yields on Treasury notes increase?

A yield increase means that the interest being charged on those notes has increased, Goldberg said. But that also means that more of the United States’ money has to be used to pay off debt interest instead of funding programs or services.

“The output of the U.S. economy, more and more of that is going to have to go to paying all of the interest on the U.S. debt,” he said.

While the credit downgrade marks a significant checkpoint in the country's dealings with its debt, David Frisch, CEO of Melville-based wealth management firm Frisch Financial Group Inc., said the country has been here before: Once in 2011 when S&P Global Ratings downgraded the United States, and in 2023, when Fitch Ratings followed suit.

“The first time it happened, as well as the second time, the markets fell kind of hard based on the news,” Frisch said. “Today, I think people expected it.”

How are Long Islanders impacted?

When borrowing money becomes more expensive for the U.S. government, local and state governments, corporations and individual consumers also feel the economic pain.

“If the cost of borrowing goes up for the U.S., the cost of borrowing goes up for Nassau and Suffolk counties,” Goldberg said. “It’s more resources going to pay interest, and fewer resources to make our lives better because the cost of borrowing goes up for everybody.”

Loans for businesses, as well as mortgage rates, credit cards, auto loans and student loans, all become more expensive for borrowers, he said.

“When interest rates are really low, for the same payment, you can buy a bigger house,” he said. "When interest rates go up, now you’re buying a smaller house.”

With AP