Ratings agencies are normally behind the curve: the market will generally start selling off long before a company actually gets downgraded. And so it might seem to be in the case of bonds backed by subprime mortgages: in the wake of the massive sell-off in such securities over the past few months, Standard & Poor's is finally saying that it might (or might not) downgrade 2.1% of the $565 billion in subprime-backed bonds that it rates.

What's fascinating is the market reaction to this news. I'm not saying that I expected this kind of thing – which was entirely expected – to cause a major rally. But surely a relatively small announcement like this – no actual downgrades, just one in fifty bonds being put on credit watch negative – was priced in to the market already?

It seems not: