S&P Global Ratings stated that revenue from Donald Trump's tariffs will help mitigate the impact of the president's tax cuts on US fiscal health, allowing the country to maintain its current credit rating.

Although Trump's trade war has roiled markets, unsettled foreign governments, and drawn criticism from leading economists, S&P affirmed the US's AA+ rating—a score it has held since 2011, when it first downgraded the world's largest economy from AAA.

This is partly because S&P expects the inflow of tax revenues to offset the impact of the recent tax and spending bill on the US budget position. This keeps the long-term rating outlook stable. "Amid rising effective tariffs, we expect significant tariff revenues to generally offset weaker fiscal outcomes likely related to the recent fiscal legislation, which included both tax cuts and increases and spending," analysts, including Lisa Schineller, wrote in a report.

The decision offers a glimmer of good news for Trump, supporting one of his arguments that the tariffs have helped improve the country's fiscal position. Tariff revenue hit a new monthly record in July, with customs duties rising to $28 billion.

Ratings firm outlooks have had a significant impact on the world's largest bond market this year. Deficit concerns prompted Moody's Ratings to remove the US's last top credit rating in May, bringing its score in line with S&P and Fitch Ratings. The move sent the 30-year US Treasury yield above 5% and raised the risk of forced selling by some pension funds.

However, on Tuesday, US bonds rallied slightly, with yields on 10- and 30-year notes falling one basis point to 4.32% and 4.92%, respectively. The dollar index fell 0.1%, indicating a muted short-term impact from the S&P report.

"It doesn't signal any material change in US fiscal health, which is a complex issue," said Homin Lee, senior macro strategist at Lombard Odier Ltd. in Singapore. Rating decisions are "essentially symbolic and tend to lag behind shifts in market perceptions," he added.

S&P said the stable outlook reflects its expectation that while the fiscal deficit will not improve significantly, it will also not continue to worsen over the next few years. The firm expects net general government debt to exceed 100% of GDP over the next three years, but it expects the general government deficit to average 6% from 2025 to 2028, down from 7.5% last year. (alg)

Source: Bloomberg