From Washington's Blog:

Many have noted that the credit downgrade may – paradoxically – cause a rally in Treasurys.

Specifically, they point out that few markets are large and deep enough to absorb the huge amount of capital currently parked in Treasurys. For example, the German bond market may be safer, but it is too small to absorb the mountains of money now in Treasurys.

And while America looks ugly at the moment, it is still winning the beauty contest as compared with Italy, Spain, and the Eurozone as a whole (and France's AAA credit may soon be downgraded).

In addition, while S&P downgraded American credit, the other two big government-endorsed rating agencies – Moody's and Fitch – still peg the U.S. at AAA.

And the downgrade is a reflection – or cause, depending on your view – of chaos. And chaos, paradoxically, tends to drive people into Treasurys.

So if Treasurys are unlikely to get hammered (at least in the short run), what will be adversely affected?

Munis will get hammered...

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