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Comment by _delirium | Hacker News Reader

This doesn't seem particularly connected to the S&P downgrade, despite the kind of vague implication in the article's intro. The downgrade didn't have the effect (contrary to some predictions over the weekend) of causing any sort of Treasury selloff or interest-rate spike, through automatic selloffs or default fears or any other mechanism--- Treasuries are actually up on the day. And it didn't provide the stock market any new information that it didn't already have heavily telegraphed during trading last week. It seems more likely that this is just increasing pessimism about prospects for economic growth, rather than worries about debt serviceability. If it were the latter, you would not expect people to be rushing to buy Treasuries that they thought were going to default.

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Unfortunately this implied "downgrade = stock plunge" association seems to be everywhere this morning with no mention that long term interest rates for US debt have actually dropped.

Depending on the source it's probably down to ignorance, lazy re-reporting or blind economic ideology, but if you believe that cutting government spending and services during a recession/recovery is a bad idea then it's a scary thing to see.

Unfortunately this implied "downgrade = stock plunge" association seems to be everywhere this morning with no mention that long term interest rates for US debt have actually dropped.

Well, if everyone believes that downgrade --> stock plunge, or even if a sufficient number of people believe that downgrade --> stock plunge, then it's no surprise that downgrade --> stock plunge.

I think the smart money will be hunting bargains. Pity I don't have any right now.

Wouldn't a downgrade be expected to result in an interest rate _increase_, due to higher risk?

You'd think so, wouldn't you?

On the other hand, where else are you gonna put your money?

In this case I'm not too surprised at the lack of change, mostly because unlike with a little-known corporate bond or an inscrutable country nobody has info on, the S&P ratings don't really add new information that any economic analyst didn't already know about U.S. Treasury bonds. So, assuming anything remotely approaching an efficient market, any information S&P based its ratings decision on should've already been priced into the bond prices, because it was information everyone else has also had for a while now.

Financial markets don't like uncertainty, and the S&P downgrade introduced a big dose of it. Not necessarily because people think the US is going belly up, but because the US is not going to be the white horse galloping in to save the Europeans, who are in far more dire straits.

The long term implication is that we are in the opening stages of the first big crisis that will require significant intervention from China. That's scary for a number of reasons.

I wouldn't discount the effect of the S&P downgrade on these stocks. The downgrade led investors to flee from risky assets to more secure assets. Counterintuitively, this is causing the price of short-term Treasuries to go up, since they are still viewed as relatively safe investments and constitute one of the largest and most liquid bond markets in the world. The S&P downgrade puts more pressure on the U.S. government to raise taxes and/or take austerity measures in the near future, and that partially accounts for the plummeting price in stocks today, with the riskiest stocks taking the biggest hit.

Could the downgrade not have led precisely, if ironically, to the treasury rally by promoting concern about the general economy, with consequent sell-off of high-risk assets and flight to safety (treasury bonds, downgrade notwithstanding, still being seen as the safest bet for a lot of people in case of general economic uncertainty)?

I wish I had a hundred up votes for this post. Does the author of the article really think that the market had no idea that the US was venturing into dangerous territory with its debt to GDP ratio?

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