Debt

Spot The Downgrade

This summer, Standard & Poor's downgraded America's credit rating. In other words, S&P decided that the U.S. government had become a slightly less reliable borrower.

Lots of people freaked out about the downgrade. It fit the familiar decline-of-America narrative and came in the middle of the endless debt-ceiling debate.

Fortunately for the U.S., one key group did not freak out: the bond investors who actually lend money to the U.S. government.

Interest Rate On 10-Year Treasury Bonds

Treasury yield

If investors thought the U.S. was less likely to make good on its debts, they would have demanded higher interest rates. (Just ask Italy.) Instead, the interest rates on U.S. government debt actually fell after the downgrade. Today, rates are under 2 percent — well below where they were at the start of the year.

This is a clear sign that investors still trust the U.S. government. But it also shows investors are still worried about the broader economy and are shying away from riskier investments. ("Flight to quality" is the phrase often used to describe this behavior.) When investors start to get more optimistic about the economy, the interest rate on Treasury bonds is likely to creep back up.

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