The stock market wasn't very pleased with the news that Standard and Poor's downgraded U.S. debt from AAA to AA+ on Friday. The major indices were down between 5% and 7% at market close on Monday. But another market wasn't particularly concerned with the downgrade on U.S. debt: the market for U.S. debt.
Below you'll find three Treasury yield curves. The first (red) is from April 15, 2011, the day before S&P first voiced its dissatisfaction with politics surrounding U.S. debt by putting the U.S. rating on Negative Watch. The second (purple) is from Friday, August 5, 2011, the last market reading prior to downgrade. The third (green) is from market close today, Monday, August 8, 2011.
Notice a trend here? The louder S&P complains, the lower the yield on Treasuries. This is the opposite of what you might expect to see. The lower a yield, the higher the demand for a bond. Put another way, as S&P became more and more critical of U.S. Treasuries, investors were willing to pay more and more money for them.
If S&P's critiques meant much to bond investors, then we'd be seeing the opposite result: Treasury yields would be rising since April. Clearly, investors must not be particularly concerned with U.S. debt's risk profile. As you can see, bonds have seen significant declines since April, particularly for longer maturities. For example, the yield of 10-year Treasury bonds has declined 103 basis points from April 15th to August 8th.