A cut to the U.S. government's credit rating by Standard & Poor's was supposed to send Treasury prices down and interest rates up. But just the opposite happened.
So why would investors buy U.S. government debt after it was downgraded from AAA to AA+ last Friday? In a word, fear.
"Fear causes investors to make decisions that don't necessarily have a fundamental basis," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
Traders said they weren't shifting money into Treasurys because they believe U.S. government bonds are a solid investment. Instead, they said, Treasurys are simply a place to hide cash.
"Of course, there's an irony here," LeBas said. "The source of the problem is the best performer of the day."
Bad news is still good for Treasurys, even with a lower rating.
When investors are anxious about the economy, they sell anything that looks risky and buy assets that are considered safer. On Monday, that meant gold and U.S. government debt rose. Junk bonds dropped and stocks took the hardest hit. The Dow Jones industrial average lost 634.76 points, or 5.5 percent, its worst one-day drop since December 2008.
By contrast, the 10-year Treasury note jumped $1.93 for every $100 invested on Monday. That pushed its yield down to 2.34 percent. That matched its lowest level this year, reached Friday.
The reasoning may sound strange but bond traders still see Treasurys as one of the world's safest hiding spots. Few people believe the U.S. would ever not pay its bills. And the massive size of the Treasury market -- $9.3 trillion in tradeable bonds, bills and notes -- allows large money managers to move quickly in and out of the market with little trouble.
In market speak, it's called "liquidity." And traders say no other market is as liquid as Treasurys. Daily trading of Treasurys is about $580 billion, much higher than debt markets in the United Kingdom ($34 billion) or Germany ($28 billion), according to a recent study by Fitch Ratings. When a crisis hits, investors race to Treasurys because they know they can sell them later.
The flight to Treasurys on Monday shouldn't be much of a surprise, said David Ader, chief Treasury strategist at CRT Capital. In late July, when the U.S. government looked like it could default on its debt payments, Treasury prices climbed and yields fell.
"When default risk was at its peak, what did the Treasury market do? It rallied," he said.
In other trading Monday, the 30-year Treasury bond rose $3.28 for every $100 invested. Its yield fell to 3.67 percent from 3.86 percent late Friday. The two-year yield sank to 0.29 percent from 0.30 percent. When bond prices rise, their yields fall.
In the market for short-term Treasury bills, the three-month T-bill paid a 0.03 percent yield. Its discount was 0.04 percent.