More than a dozen states have pristine triple-A ratings from Moody's, according to Bloomberg-compiled data, ranking them higher than the US government, which was stripped of its last top credit rating on Friday. That's in part thanks to requirements for all but one, including the District of Columbia, to balance their operating budget in some form, according to a 2021 report by the National Association of State Budget Officers.

READ MORE: Inflation news helps to push mortgage rates higher

Analysts at JPMorgan Chase & Co. also suggested in a note on Friday that states should be relatively immune. They cited a Moody's report from 2023, when the ratings firm changed its outlook on the US government to negative, that few public finance issuers were directly affected by that revision.

For the country, it's a different story. Policymakers have consistently "failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's said Friday when it downgraded the federal government to Aa1.

The move reflects deepening concern that ballooning debt and deficits will damage America's standing as the preeminent destination for global capital and increase the government's borrowing costs. That worry was swiftly reflected in market moves Friday as 10-year Treasury yields shot higher, and as an exchange-traded fund tracking the S&P 500 also fell. 

READ MORE: Tariff shock: Where smart money is going in mortgage, housing

Other parts of the financial markets, including $9 trillion of mortgage bonds effectively guaranteed by the US government, could see increased volatility Monday since they're more exposed to interest-rate moves. And while few US companies hold AAA credit scores — just Johnson & Johnson and Microsoft Corp. have those from S&P Global Ratings, for example — borrowing costs for corporates may rise as the premiums they pay to borrow are based off government debt yields as a starting point. 

If history is any guide though, US states should be fairly resilient. US states rated AAA by Fitch Ratings kept their top credit ratings even after it downgraded the US to AA+ in 2023. At the time, Florida Governor Ron DeSantis said his state was a "blueprint" for the federal government to follow. 

Still, the impact will likely be felt in some areas of the muni market — just as it was with Fitch's downgrade. After its move, Fitch cut billions of dollars worth of municipal debt that was linked to the country's rating, such as pre-refunded municipal bonds with repayments that are wholly dependent on US government and agency obligations held in escrow. 

Credits like DC and some housing transactions do have connections with the federal government, according to the JPMorgan analysts, who once again cited the Moody's report from 2023. 

After its revision in 2023, Moody's also changed the outlook on its Aaa rating of the Smithsonian Institution to negative from stable. The move reflected "the material funding and governance linkages between the Smithsonian and the United States government."

More Volatility

The muni market, in addition to corporates across America, could be impacted in other ways by the move higher in US Treasury yields. State and local debt tends to take its cues from that market.

Municipal housing bonds that are mainly secured by mortgage-backed securities issued by Ginnie Mae, Fannie Mae or Freddie Mac saw their ratings cut at the time of Fitch's downgrade. Prices of MBS fall when interest rates fluctuate, and any further moves would add to recent gyrations triggered by tariffs that proved painful for the bonds.

"Volatility remains elevated, particularly with long rates reaching relatively high levels recently," said Neil Aggarwal, a portfolio manager at Reams Asset Management. "So fixed-income investors I think do have some concerns regarding growth and liquidity already." 

Volatility increased after Fitch's downgrade in 2023, hurting returns for some investors relative to Treasuries. But on a bigger scale, Aggarwal said the overall impact for MBS would likely be contained. Major holders of the bonds don't tend to be overly sensitive to changes in government ratings, barring a bigger or unexpected downgrade. 

"Given it was a half-step downgrade and other rating agencies had already gone first, the direct impact is likely to be less than rate volatility impact," said Ken Shinoda, a portfolio manager at DoubleLine Capital. 

Following its downgrade of the US, Fitch also cut the ratings of Fannie Mae and Freddie Mac, which remained in government conservatorship after being taken over during the 2008 global financial crisis. That in turn caused credit ratings for over 400 securities tied to the two entities to be lowered.