Upward Spike in US Treasuries despite S&P Downgrade in August 2011
From P84 in ETF for Dummies, 2nd Ed, by Russell Wild :
In August 2011, as S&P downgraded U.S. Treasuries, the stock markets again
took a tumble, and — guess what? — Treasuries, despite their downgrade by
S&P (but none of the other raters), spiked upward!
Would someone please expound this paradox? Are there other resources or references on it?
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US government bonds are where money goes when the markets are turbulent and investors are fleeing from risk, and that applies even if the risk is a downgrade of the US credit rating, because there's simply nowhere else to put your money if you're in search of safety. Most AAA-rated governments have good credit ratings because they don't borrow much money (and most of them also have fairly small economies compared with the US), meaning that there's poor liquidity in their scarce bonds.
The only resources or references you need are a chart showing you what happened in those months.
The exuberance for US treasuries comes from the fact that there are no better options than them for putting cash. There are better sovereign debt instruments around the world depending on your goals, but they do not offer the same liquidity. US dollars and US Treasuries are equivalents in this context, so no matter if the wealthy speculator removed their cash from the stock market and put it in a bank or directly bought US treasuries (or their futures), this would increase the demand for treasuries.
S&P Downgraded US treasures due to political instability in the United States, since inefficiencies in the country's political structure can prevent the Treasury from paying treasury holders (aka a default). Speculators know that this doesn't effect the United States resources and revenue collection schemes, as there is ample wealth public and private available to back the treasury bonds.
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