These are words that investors in Treasury securities don’t like to read:

Standard & Poor’s cut its ratings outlook on the U.S. to negative from stable while keeping its triple-A rating on the world’s largest economy. Relative to its AAA-rated peers, the U.S. has very large budget deficits and rising government indebtedness, and the path to addressing those issues is unclear, S&P analysts said.

Yes, the U.S. keeps its AAA rating, but the massively high deficits are worrying the world, even as the rest of the world is acting to slow down inflation by inching up interest rates. (U.S. fiscal policy has also been rewarding borrowing and risk, while slamming savers with near-zero interest rates.)

We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

The stock market is not liking this — the Dow average is down nearly 2% this morning.

This needs to serve as a wake-up call to Washington.

The Treasury’s response

A senior Treasury department official – assistant secretary Mary Miller – had this response to the S&P action:  “We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.”