The value of pretty much every stock in America declined by a lot today. This is of course ostensibly because the S&P downgraded the U.S. debt rating on Friday evening. But if the market really thought that U.S. debt was riskier, shouldn’t we have seen the government’s cost of borrowing increase today? Instead, the opposite happened. The chart above, via Bloomberg, is of T-bill yields Friday and today. The greenish line is today. Short-term loans are very slightly up, while long-term loans are rather cheaper. And it’s quite a bit cheaper for the Federal government to borrow short-term than it was a week ago, before the downgrade but also before the debt ceiling was raised.

So what’s going on here? Part of the explanation is that U.S. government debt is still seen as the safest investment out there. Investors, expecting the stock market to go down, traded their stocks for long-term bonds. But if investors still trust the U.S.’s credit, and stocks declined based on doubts about U.S. credit, why didn’t investors buy back these stocks at a cheaper price late in the day, causing the market indicators to go back up? There are two possible reasons. The first is that the stock market is not really very rational. The second is that there are lots of other causes for concern, most notably in European debt but also in the relatively slow pace of economic recovery worldwide. If this is true, then the gains in stock market value over the last year (the vast majority of which have been erased in the past two weeks) were over-exuberant, and we’re seeing a necessary correction now. Both these reasons can be true, but I really don’t think we can see that many more days like today in the near future.