The rating downgrade, along with continued turmoil in European markets and fears that the United States might be entering a new recession, caused a flight to safety among investors. And, notwithstanding the agency’s opinion, money flooded into Treasuries and the demand for American dollars grew.
Since then, Treasury bonds have been one of the few investments that have produced good profits. As can be seen from the accompanying charts, an investor in long-term Treasuries would have earned a double-digit return, counting the small interest earned and the larger capital gains from rising prices. Shorter-term Treasuries have also rallied, although by smaller amounts.
The problem for the rest of us is that Treasuries outperforming other investment possibilities largely reflects poor economic performance.