A couple of things to keep in mind about US Treasury bonds, amid all this downgrade hysteria;

Once a bond is issued by the US Treasury, via the auctions held on its behalf by the NY Federal Reserve Bank, the rate of interest paid by the Treasury does not change. The daily and even minute by minute changes in the oft quoted "yield" of a ten year Treasury for instance, are quotes from the secondary market. That is, those bonds which are trading between individual parties. If the yield of the ten year goes up in this regard, it doesn't change by one single cent the amount of money the US Government pays on that bond.

When the Treasury auctions occur, the primary dealers bid on them and their price is set by these bids. If the difference between the previous coupon rate and the yield being bid is great enough, the coupon will be altered accordingly.

Example;
The last time the NY Fed conducted an auction of 10-year notes was on the 15th of last month. The coupon rate remained unchanged from the previous auction at 3.125% and that auction occurred on June 15th (Ten Year notes are auctioned monthly).

A 3.125% coupon means that if you bought one of these ten year bonds, you would receive $31.25 per year in interest payments from the Treasury, paid to you in two installments, 6 months apart.

On July 15th, the demand for those new issue bonds was high enough that bidders were willing to pay MORE than their $1000 face value for them, and as a consequence, the yield was 2.198%. But that was only to the original bidders and those are limited to a list of primary dealers allowed to participate in such auctions. Please, PLEASE note that "China" is NOT one of those dealers. Subsequent trading of those securities on the secondary market is where the movement of the yield is realized, but as I said above, it doesn't change the amount the Treasury pays in interest payments on those bonds. The fact that the Treasury was able to get more than face value for them is a GOOD thing, as it means they got more than a grand for a bond with a face value of a grand.

Here's the list of recent auctions conducted by the NY Fed;

http://www.treasurydirect.gov/RI/OFNtebnd

What will be interesting to watch is if, on the 15th of this month, the coupon rate for the ten year is raised. THAT will be the indicator of what everyone is wringing their hands about.

Edited because my "S" key is wearing out!

Also edited to add the following;

Though the Treasury has different names for the various securities it issues, they are all basically "bonds", whether they are called "notes", "bills" or what have you.

15th 10 year auction, not only was there issues about downgrades floating about, but also if Congress would cause a default

Anyone who bought those bonds at auction paid a premium as you pointed out, but in addition, those bonds increased in value as of last Friday

I suspect except bill gross will not be a happy camper when he finds that demand for the 10 years are good

The U.S. is not in any danger of default, contrary to what some of the hype is. Worse gets to worse the U.S. can always print money

'notes' and 'bonds' pay interest periodically (every 6 months) whereas T-bills don't pay interest.
Any 'interest' earned from buying a T-bill comes from the difference in the price you pay for the
T-bill and the face-value of the bill paid when the bill matures.

The only difference between 'notes' and 'bonds' is one of nomenclature. Interest paying securities
maturing between 1 and 10 years are called 'notes' while those maturing in 20-30 years are called 'bonds'

See: http://en.wikipedia.org/wiki/United_States_Treasury_security

I could have made my OP a couple of paragraphs longer and explained the difference between a zero coupon Bill, a Note and a Bond, as well as delving into TIPS, Strips and the various other series of bonds issued by the Treasury and/or available to the public.

I didn't because the primary focus is on the Ten Year and yield and how that will be affected by the rating downgrade. I didn't want to get into irrelevant issues.

http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

Unlike T-bills, T-notes, and T-bonds the interest rate paid on TIPS can changed after
the security is issued (based on the Consumer Price Index).

See: http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

and I considered them irrelevant to the point I was trying to make.

By the way, it isn't the interest rate that changes per se, rather what changes is the principal amount of those securities and therefor the amount paid through the coupon changes. The coupon, or the initial interest rate remains unchanged through the life of the paper. They do not have a set Par like other Treasuries.

cause I posted this way early this morning.