The trend threatens to drive up interest rates for everything from credit cards to mortgages, while pressing the brakes on economic growth, analysts told ABC News.
"If you borrow money, your rate will go up," Jim Bianco, a market analyst at Bianco Research, told ABC News. "Yields pretty much affect everybody."
Moody's, a top ratings agency, cut the U.S. credit rating on Friday, dropping it one notch from the top rating of Aaa to a lower classification of Aa1.
The credit reassessment at Moody's came years after similar downgrades of U.S. debt at the two other major credit agencies: S&P in 2011 and Fitch in 2023.
The latest downgrade arrived at a moment of heightened volatility in bond markets, however. Long-term Treasury yields soared last month in the immediate aftermath of President Donald Trump's "Liberation Day" tariffs.
House Republicans are moving to pass a domestic policy bill that includes broad tax cuts, which risks deepening the $36 trillion U.S. debt, the nonpartisan Congressional Budget Office found.
Callie Cox, chief market strategist at Ritholtz Wealth Management, told clients on Monday that the impact of the Moody's announcement amounted largely to an issue of bad timing.
"This was the opposite of a surprise -- it was a long time coming," Cox said. "But it's a headline that came at a wildly inopportune time."
The Moody's announcement sent the yield on a 30-year Treasury bond to a high of 5.01% at one point on Monday.
Bond yields rise as bond prices fall. When a selloff hits and demand for bonds dries up, it sends bond prices lower. In turn, bond yields move higher.
The yield for long-term Treasury bonds helps set interest rates for a host of consumer loans, analysts said.
"When you have a credit downgrade, that signals higher risk, which means higher payment to bear that risk," John Sedunov, a finance professor at Villanova University's School of Business, told ABC News.
"For consumers, whatever you might borrow to finance -- cars, houses, vacations -- this makes it all more expensive," Sedunov added.
When interest rates rise, businesses also face higher borrowing costs, making it less likely that firms would move forward with an office expansion or round of hiring, analysts said. In turn, such conditions risk an economic slowdown.
"It can put downward pressure on the economy if interest rates get high enough," Bianco said. "The big question is: How high do rates have to go?"
Still, the volatility in the bond market may ease depending on the path forward for government debt and inflation, analysts said.
The previous credit downgrades at Fitch and S&P stoked similar investor fears, but the U.S. averted a recession in the aftermath of each announcement.
Stock traders on Monday appeared to shrug off the credit downgrade. The S&P 500 fell more than 1% in early trading, before recovering nearly all of the losses. The Dow and Nasdaq also moved lower early in the day, but each later turned upward.
By midday, the 30-year Treasury yield had dropped from a high above 5% to level hovering near 4.92%.
If the U.S. continues to deepen its debt, the federal government will need to spend a growing share of its budget on interest payments, analysts said. The rising borrowing costs could hike interest payments, which in turn may increase the interest payments, causing a self-perpetuating financial spiral.
Policymakers have faced a growing national debt for decades, but the Moody's downgrade may serve as a wake-up call, some analysts said.
"This is a major symbolic move as Moody's were the last of the major rating agencies to have the U.S. at the top rating," Deutsche Bank analysts said in a client note shared with ABC News.
"One of the most widely acknowledged things in financial markets is the unsustainable path of the U.S. national debt," Deutsche Bank analysts said. "The big unknown is when it all tips over."