U.S. Treasurys shake off 2011 S&P downgrade

The rating agency Standard & Poor's stunned the world a year ago by stripping the U.S. government of its prized AAA bond rating.

The downgrade of long-term U.S. Treasurys threatened to sow chaos in financial markets, driving up U.S. interest rates, pushing the dollar down, scaring investors away from stocks and into that traditional refuge for the fearful: gold. The Dow Jones industrials dropped 635 points in panicked selling the first day of trading after the S&P announcement.

A year later, S&P's historic move looks like a non-event. Long-term interest rates are sharply lower; the Dow is up more than 1,600 points. The dollar has rallied, and gold prices are down from where they were.

Rival rating agencies Moody's and Fitch have said they might downgrade the U.S. government's blue-chip rating, too.

It is difficult to imagine a more decisive repudiation of S&P's warning that the U.S. government might not be able to pay its bills.

But things aren't simple. After all, the rating agency downgraded federal debt largely because it feared that America's dysfunctional political system couldn't deliver credible plans to reduce the federal government's debt.

A year later, Democrats and Republicans are still deadlocked over how to reduce the annual gap between what the government spends and what it collects in taxes. That deficit is expected to be $1.1 trillion in the fiscal year that ends Sept. 30.

Despite S&P's warnings and the political stalemate, investors still want U.S. Treasurys. Given economic turmoil in Europe and uncertainty elsewhere, U.S. government debt and U.S. dollars look like the safest bet around.