This weekend we covered the likely consequences of the S&P downgrade in three parts (1, 2, 3). While the day is young, it looks as if the heart of these forecasts is what’s happening: equities are selling and those dollars are seeking the safe haven of U.S. Treasuries and mortgage backed securities. While it may sound counterintuitive for the downgrade of one debt rating firm to increase the value (the price of U.S. Treasuries) of that which is downgraded the fact is that the S&P downgrade created a gigantic amount of uncertainty and uncertainty tends to cause equity selling and Treasury/MBS buying.
By no means do I want to suggest that the big drop in yields will last. We are seeing the consequences of fear-based equity selling. I would draw no conclusions about the longer term effect of the S&P downgrade until we let this week play out. This week has little in the way of fundamentals but it is hardly fundamentals which drive markets when fear and uncertainty reign. Worker Productivity and Costs (Tuesday), Trade Deficit (Thursday) and Retail Sales and Consumer Sentiment (Friday) and the headlines for the rest of the week.