Bond Vigilantes and Market Vigilantes are Not the Same People
If Consumer Reports came out with a widely discussed report telling us they are lowering their rating on a particular type of car, what would you expect to happen to the price of that car? And, if you believe that markets are smarter than people, if the price goes up instead of down, what would the reaction say about the market's confidence in firm issuing the ratings?
The price of bonds went up today, not down. From the WSJ:
Treasury bonds proved again Monday that they are still a haven for global investors despite the first credit-rating downgrade on the U.S. in modern history from one of the big three firms.
Bond prices rallied broadly as investors fled risky assets including U.S. stocks, with the benchmark 10-year note's yield falling toward the lowest level since October. The two-year note's yield earlier hit a fresh record low of 0.232%, falling below the top end of zero-0.25% range for the Federal Reserve's key policy rate. ...
"Double-A plus is the de facto triple-A," said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which manages $342 billion. "There is a lot of fear in the markets right now and Treasurys are still the place to go." ...Investors appear to be piling into Treasurys as a safe haven amid the turmoil.. That is, part of the story today is that people are getting out of stocks and moving into Treasurys.
That's much more consistent with a story involving fears of a weak economy than it is fears about default on the debt.