Standard & Poor's spoke loudly and clearly when it downgraded U.S. debt, but the Treasury market on Monday didn't appear to be listening.
While stock markets were selling offaround the world bonds rallied. The 30-year bond pricegained more than a point in price as investors sent their own clear message that in times of turmoil, Treasurys were still the safest house on the block.
The movements seemed to suggest that S&P, for all the bluster and bold headlines its move created, was not calling the shots.
"It just shows that the financial markets have concluded on their own that U.S. Treasurys are the highest credit quality bonds that are available," said Jim DeMasi, chief fixed income strategist at Stifel Nicolaus in Baltimore. "There's no substitute for the safety, liquidity, and basically the quality of U.S. Treasurys. That's the market's conclusion. S&P has a different view of that and it hasn't changed market perceptions in any way."
S&P issued its ruling Friday in large part due to the political mess in Washingtonand the inability of Congress to meet $4 trillion in debt reduction that the agency had demanded to forestall a downgrade.
Moreover, S&P officials said over the weekend that additional downgrades are possibleif a deficit reduction committee Congress is forming fails to reach meaningful cuts.
Still, the market is being considered the ultimate arbiter of U.S. credit quality.
"If we do not show a commitment as a country to deal with our problems, that would be a game-changer," DeMasi said. "The Budget Control Act (that allowed the U.S. to raise the debt ceiling) is the first step in the right direction on a long journey towards what needs to be a much more concerted effort to control this issue over the long term."
Few if any connected to the issue are disputing that U.S. finances are in poor shape, with a $14.3 trillion U.S. debt and a budget deficit of $1.5 trillion—numbers that both are expected to continue to grow.
But with peripheral Europe in even worse shape than the U.S., and as economic troubles continue to brew in the U.S. and create more uncertainty about the future, saber-rattling by ratings agencies is unlikely to have much effect.
"U.S. Treasurys reflect the combination of financial (debt, deficits and ratings), fundamental (economic), technical, and policy influences," Mohamed El-Erian, co-CEO of bond giant Pimco, said in an analysis for CNBC.com. "The impact of the first is being understandably overwhelmed by the other three—in market jargon terms, the credit component of Treasurys is dominated by the interest rate component."
In other words, even if the U.S. has continued credit issues, interest rates will stay low as the economy struggles toward mere stability, with real growth seemingly off in the future as more and more analysts cut their outlooks.
"S&P's action is much less about America's inability to repay its government debt and much more about the continued failure of policymakers to get their arms around the problems undermining growth, employment, financial soundness and prosperity," El-Erian said.
In essence, then, the markets were reacting in what could be considered a typical way as debt problems surge around the globe and policy makers grope for a proper response.
"It's encouraging to see that there's some rational thought going on, that it's not outright panic," said Kevin Ferry, president of Cronus Futures Management in Chicago. "In times like this, it's the worst of both worlds. (Investors are) overweight highly volatile, risky assets. If they leave them, they have to take low-yielding Treasurys."
Another reason Treasurys were not plunging Monday was that the market had three weeks to price in S&P's move.
Yields on short-dated government securities rose sharply in the days after the agency first made its threats in mid-July but have since come back in.
"By and large we were expecting this, and we're not out of the woods yet on a lot of the global uncertainties and growth concerns," said Kim Rupert, managing director of global fixed income analysis for Action Economics in San Francisco. "Really there isn't another good alternative to Treasurys at this point."
That lack of another credible safety vehicle likely will, for now, drown out anything S&P has to say on the state of U.S. debt.
"We've got a lot of big macro risks and Treasury remains the beneficiary of those," said Jessica Hoversen, fixed income analyst at MF Global in New York. "If Congress begins compromising after this embarrassing display and S&P's actions, we won't have to worry about another downgrade."