Though a lower credit rating should increase the United States’ borrowing costs, yields on U.S. Treasuries dropped today, the first day investors could react to Standard & Poor’s downgrade of U.S. debt, CNNMoney reported.
 
The reason for the drop is that S&P’s unprecedented move adds more uncertainty to the market, and greater uncertainty drives investors out of risky assets such as stocks and into perceived safe havens, including U.S. Treasuries, CNNMoney said.

The yield on the benchmark 10-year Treasury note fell to 2.47 percent this morning from 2.56 percent late Aug. 5. The yields on other Treasuries also retreated.

At 9:20 a.m. Iowa time, the Dow Jones industrial average had dropped nearly 300 points, Nasdaq 81.5 points and the Standard & Poor’s 500-stock index 37.4 points.

“The U.S. Treasury sector remains the largest and most liquid fixed-income market in the world with the greatest degree of price transparency and few genuine alternatives,” said BlackRock, the world’s largest money manager.

Therefore, the firm said, Treasuries will likely continue to perform their traditional role as a hedge against risk assets, and will welcome strong bids from institutional investors of all kinds, including banks.

“While a time may come when the credit risk-free status of Treasury bonds is diminished by continued policy missteps, we do not believe that the S&P downgrade signals that this moment has come now,” BlackRock said.

China, which is the largest holder of U.S. debt, with more than $1 trillion in U.S. Treasuries, used S&P’s rating cut as an opportunity to demand that Washington get its fiscal house in order and to question the primacy of the dollar. Still, the country has no plans to dump U.S. debt anytime soon.