S&P Downgrade: Shock May Be Short Lived

Last Updated Aug 6, 2011 12:11 PM EDT

If there's a silver lining to Standard & Poor's unprecedented downgrade of U.S. debt, it's that once markets get past the initial shock Monday, the bomb may prove to be more flash than bang for stocks and Treasuries, alike.

After all, Moody's and Fitch, the other two major ratings agencies, re-affirmed Uncle Sam's top-notch credit score last week. And as for S&P, the agency has been telegraphing its downgrade for months, giving the markets plenty of time to digest the possible implications and price in the news.

Warren Buffett, America's most revered investor, says the nation's credit score is still sterling in his eyes. Barring other shocks like a new problem in Europe, the S&P downgrade shouldn't make a whit of difference, he says.

"Think about it. The U.S., to my knowledge, owes no money in currency other than the U.S. dollar, which it can print at will," Buffett told a media outlet in wake of the S&P downgrade.

The action in the Treasury market during the debt-ceiling standoff certainly affirmed investor confidence in U.S. debt. Yields on the benchmark 10-year Treasury note fell as the Federal government came perilously close to defaulting on its obligations.

That means prices rose. In other words, appetite for U.S. debt actually increased as the government flirted with default. Weird, but true.

Treasurys' safe-haven status was further affirmed by market participants over the last five days as stock markets around the world reeled.

The blue-chip Dow Jones Industrial Average plunged almost 700 points, or nearly 6 percent, last week, marking its worst run since the dark days of 2008. Meanwhile, money flowed into U.S. debt, giving the 10-year Treasury a gain of almost 10 percent over the same period.

Make no mistake: Monday's market action is almost certainly going to be ugly. But any drop in bond prices (and spike in yields) could very well be short lived. The glacial pace of economic growth and very real chance of a double-dip recession suggest U.S. debt will keep its safe-haven status -- and borrowing costs will remain low.

Like it or not, the Treasury market is the biggest and most liquid in the world. And investors, sadly, don't have all that many options.

Image courtesy of flickr user Ian Ransley Design + Illustration, CC 2.0.
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    Dan Burrows, a veteran of Aol's DailyFinance, SmartMoney and MarketWatch from Dow Jones, covers the markets and economy with an eye toward investing for the long haul.