OK, Standard & Poor’s downgrades the U.S. government. Investors are supposed to panic and flee government bonds. Interest rates should go up. The cost of borrowing gets more expensive for everyone — including those seeking home mortgages.
But look what’s actually happening: Interest rates are going down. It seems investors still believe in the stability of the U.S. government over other investments. It’s not supposed to work this way.
Guy Cecala, publisher of Inside Mortgage Finance Publications, puts it bluntly to the LA Times: “The stock market continues to be in the toilet. Investors don’t really have the choice to abandon Fannie and Freddie debt or Treasuries, so actual rates are going down.”
S&P is going to have a lot of explaining to do if this keeps up. The markets are saying the complete opposite of what S&P warned about in its downgrade report. It wouldn’t be the first time S&P screwed up.