Upward Spike in US Treasuries despite S&P Downgrade in August 2011
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. 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.
Too expand on /u/stoneeus, mortgage rates were/are also heavily influenced by the FED QE program, which holds about $4.5T in mortgage-backed securities and treasuries on the FED's balance sheet. The FED has been holding this balance steady since it ended the QE program a couple years ago, purchasing new securities as old ones mature. However, the FED has started signalling that they are going to end these purchases and let their portfolio wind down. Once that happens, you'll start to see mortgage rates rise. Robert Shiller has an on-line page with links to download some historical data that may be what you want here. Center for the Research in Security Prices would be my suggestion for another resource here. Your quote from the CBO is talking about a actual subsidy. As stated, there was a cash value difference between what the Treasury purchased troubled assets from banks at and what the market value of those securities were.   This (the point mentioned in the article) is not an actual subsidy.  As a counter argument to your first paragraph, look at Lehman Brothers and Bear Stearns. That's exactly why they *should* have tightened faster. A recession now is more likely than it was in 2011-2012 and they can't drop rates of that happens because they never raised them. They're basically buying time before the debt catches up, but they're doing it with more debt so they're treating the immediate symptom and ignoring the long term disease. "This is a speculative question and there's no ""correct"" answer, but there are definitely some highly likely outcomes. Let's assume that the United States defaults on it's debt. It can be guaranteed that it will lose its AAA rating. Although we don't know what it will drop to, we know it WILL be AA or lower.  A triple-A rating implies that the issuer will never default, so it can offer lower rates since there is a guarantee of safety there.People will demand a higher yield for the lower perceived security, so treasury yield will go up.  The US dollar, or at least forex rates, will almost certainly fall. Since US treasuries will no longer be a safe haven, the dollar will no longer be the safe currency it once was, and so the dollar will fall. The US stock market (and international markets) will also have a strong fall because so many institutions, financial or otherwise, invest in treasuries so when treasuries tumble and the US loses triple-A, investments will be hurt and the tendency is for investors to overreact so it is almost guaranteed that the market will drop sharply. Financial stocks and companies that invest in treasuries will be hurt the most. A notable exception is nations themselves. For example, China holds over $1 trillion in treasuries and a US default will hurt their value, but the Yuan will also appreciate with respect to the dollar. Thus, other nations will benefit and be hurt from a US default. Now many people expect a double-dip recession - worse than the 08/09 crisis - if the US defaults. I count myself a member of this crowd. Nonetheless, we cannot say with certainty whether or not there will be another recession or even a depression - we can only say that a recession is a strong possibility. So basically, let's pray that Washington gets its act together and raises the ceiling, or else we're in for bad times. And lastly, a funny quote :) I could end the deficit in 5 minutes.   You just pass a law that says that   anytime there is a deficit of more   than 3% of GDP all sitting members of   congress are ineligible for   reelection.   - Warren Buffett" [Japan] had been for some time, but during the recession, China went strongly for US debt as a hedge against a depression occurring. Now that the world economy is rebounding, China can get a bit more aggressive and will probably back off on treasuries. No.  If you have to ignore a price spike, obviously its value is not constant.  Gold is a commodity, just like every other commodity. In regards to your title, it's based on product. Rates based products had a late 2016 early 2017 run. It's now summer time and the fed is acting as expected. Clients have already positioned themselves going into the slow season. Distressed bonds and HY loans are still moving. After the latest fed increase and the yield curve flattening, HY loans took a hit. Par loans were trading at a discount. The market has moved back to paying a premium. However, HY bonds have been slowing down since June. New issue has dropped off, and equities have slowed as well. It's summer time. I wouldn't say that traders have it tough as the tittle suggests, it's just that it was a very active first quarter and now volatility has subsided. It's just the quiet season. Supply and demand for a particular bond may be such that the market price exceeds the par value for the bond at maturity. This is when you get a negative yield. Especially when volatility is high, people will actually pay money to park it in treasuries for an amount of time. But when compared to a > 25% vol in the equities market over that same period, taking a 5% or less hit doesn't sound nearly as bad! The math that works at the nation-scale doesn't work the same for an individual or even smaller companies (even though larger companies actually dwarf many whole *countries*).   So while US Treasuries are a good investment for many foreign governments, that isn't universally true for all investors. "The difference between me and Uncle Sam is that Uncle Sam gets the lowest interest rates in the world.  If I could borrow money at 1.7% for 10 years you bet your ass I'd do it!    Also, the notion that ""Uncle Sam is running out of people to borrow from, and is having trouble paying those loans back (and the interest)"" is just false.  US treasuries are the most sought after debt in the world.  If anyone had any doubt uncle sam would pay them back, interest rates would be skyrocketing, not at historic lows.  After that quote I turned it off, about two minutes in.  This is just more FUD designed to get you to buy gold or whatever.  Ignore it." Many of the major indices retreated   today because of this news. Why? How   do the rising budget deficits and debt   relate to the stock markets? The major reason for the market retreating is the uncertainty regarding the US Dollar. If the US credit rating drops that will have an inflationary effect on the currency (as it will push up the cost of US Treasuries and reduce confidence in the USD). If this continues the loss of USD confidence could bring an end to the USD as the world's reserve currency which could also create inflation (as world banks could reduce their USD reserves). This can make US assets appear overvalued. Why is there such a large emphasis on   the S&P rating? S&P is a large trusted rating agency so the market will respond to their analysis much like how a bank would respond to any change in your rating by Transunion (Consumer Credit Bureau) Does this have any major implications   for the US stock markets today, in the   short term and in July? If you are a day-trader I'm sure it does. There will be minor fluctuations in the market as soon as news comes out (either of its extension or any expected delays in passing that extension). What happens when the debt ceiling is   reached? Since the US is in a deficit spending situation it needs to borrow more to satisfy its existing obligations (in short it pays its debt with more debt). As a result, if the debt ceiling isn't raised then eventually the US will be unable to pay its existing obligations. We would be in a default situation which could have devastating affects on the value of the USD. How hard the hit will depend on how long the default situation lasts (the longer we go without an increased ceiling after the exhaustion point the more we default on). In reality, Congress will approve a raise, but they will drag it out to the last possible minute. They want to appear as if they are against it, but they understand the catastrophic effects of not doing so. The US Treasury is not directly/transactionally involved, but can affect the junk bond market by issuing new bonds when rates rise. Since US bonds are considered completely safe, changes in yield will affect low quality debt. For example, if rates rose to levels like 1980, a 12% treasury bond would drive the prices of junk bonds issued today dramatically lower. Another price factor is likelihood of default. Companies with junk credit ratings have lousy balance sheets, so negative economic conditions or tight short term debt markets can result in default for many of these companies. Whether bonds in a fund are new issues or purchased on the secondary market isn't something that is very relevant to the individual investor. The current interest rate environment is factored into the market already via prices of bonds. This directly relates to the ideas behind the yield curve. For a detailed explanation of the yield curve, see the linked answer that Joe and I wrote; in short, the yield curve is a plot of the yield on Treasury securities against their maturities. If short-term Treasuries are paying higher yields than long-term debt, the yield curve has a negative slope. There are a lot of factors that could cause the yield curve to become negatively sloped, or at least less steep, but in this case, oil prices and the effective federal funds rate may have played a significant role. I'll quote from the section of the linked answer that describes the effect of oil prices first: a rise in oil prices may increase expectations of short-term inflation, so investors demand higher interest rates on short-term debt. Because long-term inflation expectations are governed more by fundamental macroeconomic factors than short-term swings in commodity prices, long-term expectations may not rise nearly as much as short term expectations, which leads to a yield curve that is becoming less steep or even negatively sloped. As the graph shows, oil prices increased dramatically, so this increase may have increased expectations of short-term inflation expectations substantially.  The other answer describes an easing of monetary policy, e.g. a decrease in the effective federal funds rate (FFR), as a factor that could increase the slope of the yield curve. However, a tightening of monetary policy, e.g. an increase in the FFR, could decrease the slope of the yield curve because a higher FFR leads investors to demand a higher rate of return on shorter-term securities. Longer-term Treasuries aren't as affected by short-term monetary policy, so when short-term yields increase more than long-term yields, the yield curve becomes less steep and/or negatively sloped. The second graph shows the effective federal funds rate for the period in question, and once again, the increase is significant.  Finally, look at a graph of inflation for the relevant period.  Intuitively, the steady increase in inflation from 1975 onward may have increased investors expectations of short-term inflation, therefore increasing short-term yields more than long-term yields (as described above and in the other answer). These reasons aren't set in stone, and just looking at graphs isn't a substitute for an actual analysis of the data, but logically, it seems plausible that the positive shock to oil prices, increases in the effective federal funds rate, and increases in inflation and expectations of inflation contributed at least partially to the inversion of the yield curve. Keep in mind that these factors are all interconnected as well, so the situation is certainly more complex. If you approve of this answer, be sure to vote up the other answer about the yield curve too. The people who bought when interest rates were higher, do they get anything out of it? The present value just went up of their Bonds just went up, but it probably evened out to the 3% they were going to get right? Do they make more money selling the bond now, or holding on to it till maturity in PV terms?