former

When credit rating was downgraded on US bonds, I expected that interest rates to increase. Applying simple straight correlation, lower the credit rating - higher the expected return. However, surprisingly the interest rates dropped.

When I thought about it, not so surprisingly, if US bonds were downgraded and the expected return increased on them, all other assets(stocks and corporate bonds) that are measured against US bond returns, suddenly became richer and everyone wants to move out of them. All the money now needs to be parked back into safe instruments while they reevaluate the more risky assets, so the increased demand for US bonds decreased the rates.

Well, when markets are running for safe havens, US bonds are still triple AAA. Rating agencies downgraded US bonds due to political risk. When US starts cutting the debt the rating will eventually go back up. Will the downgrade eventually require higher rates on US Bonds? sure. But will it happen and if yes, when? not sure.