Government

Bond Investors' Reaction To The Downgrade: Buy Treasuries!

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I'm generally wary of writing about short-term moves in the markets. There's an overwhelming temptation to confuse correlation and causation, and to impose some false, newsy narrative on the world.

But sometimes I can't resist:

Stocks were down this morning, and the interest rate on Treasury bonds fell.

In other words, bond investors' first reaction after S&P's downgrade of U.S. government debt was to be even more eager to lend money to the U.S. government.

On one level, this isn't terribly surprising. As we noted on Friday, the S&P downgrade didn't tell the world anything new. S&P didn't have any inside information. It was just voicing its opinion.

What's more, most Treasuries are held by big, institutional investors who do their own research and don't rely on rating agencies for this sort of thing. And, while ratings do play a role in financial regulation, regulations treat AAA and AA-plus the same way, for the most part.

If you really want to cram this morning's decline in Treasury yields into a narrative about the downgrade, you could say that the downgrade of U.S. government debt scared investors, and what investors do when they're scared is buy U.S. government debt.

But that just sounds ridiculous, doesn't it?

So let's go with another, less-ridiculous sounding (though still possibly false) narrative.

There has been a string of bad economic news lately. Europe is still a mess. And in the U.S., we learned recently that the economy is growing even more slowly than we previously thought.

Slowing economic growth — and, more generally, fear — tends to make people sell stocks and buy bonds. And that's what's happening this morning.

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