Treasury bonds come with a bullet-proof guarantee: the US Constitution. The 14th Amendment, Section 4 states, “The validity of the public debt of the United States, authorized by law, including debt incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
Today, notes are backed by “the full faith and credit of the US government.”
It’s enough for banks, whose regulations give Treasurys a preferred status not contingent on ratings, due to their liquidity and relative safety. Given this, most investors won’t dump Treasurys because S&P knocked off its AAA rating, says Professor Saboori.
“Even with the drop in rating, [investors] still find US Treasurys a much safer asset than other assets,” he says. “That explains why the demand for US Treasury bonds is still high.”
