Treasuries shake but survive first AA+ week

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NEW YORK (CNNMoney) -- The ground shook, but the market for Treasuries sure didn't collapse in the wake of Standard & Poor's downgrade of U.S. debt. In fact, U.S. debt remains quite a popular investment.

But that doesn't mean the status quo is preserved or that this is a calm and predictable market.

Some observers were sure a downgrade would scare investors away from Treasuries, but the wrist-slap from S&P had the opposite effect: Investors reacted to a week of fire and brimstone headlines by seeking the familiar safe haven of U.S. debt.

The downgrade happened. Equities crashed. Then rebounded. The Dow seesawed all week, closing with a net change of more than 400 points for four straight sessions -- something that has never happened before.

"One of the reasons we've had all this volatility is people have applied all their old metrics to a new world," said Jim Vogel, an interest rate strategist at FTN Financial. "People are almost overconfident in their ability to trade on the impact on the downgrade."

But unintended consequences caught lots of investors by surprise. For example, S&P's decision to whack the U.S. led many money mavens to start questioning why nations like heavily indebted France and the U.K. should still have perfect credit ratings.

That question, and rumors of an impending downgrade on France, set off a virtual run on French bank stocks earlier this week, as speculation grew that one large institution was in trouble.

And in this new world, that was the kind of trade that pushed money into Treasuries. On Tuesday, yields on the benchmark 10-year note briefly touched a record low of 2.03%. It has since rebounded to 2.24% -- still a very depressed level.

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"Do people still like Treasuries? Or do they dislike other things to the extent they are going to invest in Treasuries for a while?" Vogel asked. "The ramifications [of the downgrade] for other sectors right now are more painful. But it's way too early to draw any conclusions."

Adding to the bond market's near-crazy level of activity was the Fed's unusual move on Tuesday to tell the world in plain English that it intends to keep rates near zero for the next two years.

"That was a very powerful move in the middle of all this that caught a lot of people wrong-footed," Vogel said.

One of the biggest questions marks heading into the week was whether Treasuries would draw a substantial amount of demand at auction. They did -- until Thursday's sale of 30-year bonds, the first long-term bonds auctioned in the AA+ era.

Treasury auctioned $16 billion of 30-year bonds at a yield of 3.75%, well above the 3.62% the security had been trading at earlier in the day. Only a day before, Treasury was able to sell $24 billion in 10-year notes at a record-low yield of 2.14%.

The difference? The Fed's decision to keep key short-term rates low means a measure of stability for medium-term bonds. But 30 years into the future? All bets are off.

And that means investors are less willing to stash their money in long-term bonds.

"There are just a whole lot of wild cards," Vogel said. Don't be surprised if more of them hit the table in weeks to come.