Stocks Drop, but Bonds Soar

Stocks fell sharply as US credit was downgraded from a stellar AAA to AA+, including all sectors in the S&P 500.

With stocks seeing the biggest drop since the financial crisis in 2008, investors are now going with the mindset to "sell first, and ask questions later".

To add insult to injury, Standard & Poor (S&P) today downgraded Freddie Mac, Fannie Mae and ten Federal Home Loan Banks today as well from AAA to AA+.

"The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government," Standard & Poor's said in a statement.

On the other hand, investors are rushing into buying bonds rather than stock. The price of the 7-year bond rose over a point, two full points for the 10 year bond, and a full three points for the 30-year U.S. Treasury bond.

"Treasurys are up because they are still the flight to quality instrument despite what S&P says," said Thomas Roth, executive director in the U.S. government bond trading group at Mitsubishi UFJ Securities (USA) Inc in New York, according to a report by WSJ. "All that has occurred is more uncertainty which drives money out of risk assets."

Futures trader Todd Colvin says this is the 'big picture' stuff. "Macro guys are looking at this, and it's not what's going to happen tomorrow -it's what's going to happen months from tomorrow. You could see weaker demand for U.S. products from other countries and this is probably going to hit the municipal markets."

Michael Franzese, head of Treasury trading at Wunderlich Securities in New York, explained "Stocks are getting hit because of the slowing economy and the rating cut hurts every US-based AAA corporation and muni. So you put your money in gold, but that has made its downgrade move, so treasuries get the flows."