When the credit rating of a fixed-income security is cut, this means the security has higher default risk. What follows is that the price will go down. However, the opposite happened in 2011 to US Treasury securities. Why did Treasury securities go up when US lost its AAA credit rating in 2011?
The short version of your answer is that bonds from the US Treasury are sold with a fixed interest rate that is determined by the issuer at the time of auction. If this (the quoted interest rate) is 'what went up', then it went up simply because the Treasury decided to issue securities at a new rate.
What matters to investors at the end of the day for bonds is 'yield'. This is the effective interest rate received by an investor who purchases securities at auction. This is the number to watch if you're trying to see the impact of a market-shaking announcement like the time when the US' rating was downgraded.
Based on what I can see by comparing Aug 1, 2011 and Aug 8, 2011 on this handy chart from the Treasury, YIELDS went down after the announcement was made. (Wikipedia says downgrade happened Aug 5, 2011.) That seems counterintuitive, as the logic you mentioned above means that this should be a more risky asset with the lower credit rating, and investors would want more yield for the higher risk.
If that's what you're really trying to get at, then you need to look at what else was going on in the world at the same time. This article from BusinessWeek hints that the bottom was really falling out of European bond markets about the same time. So even though the US Treasury was being downgraded, everywhere else was so much worse that the US--even at a higher risk level--was seen to be less risky and so investors piled their money into US debt.
The price and interest rate of a bond are determined at auction.
The Treasury doesn't choose interest rates. Treasury Bonds, Notes, and Bills are auctioned off with Primary Dealers being the main bidders. Primary Dealers are required to bid at Treasury auctions. The auctions take place on a yield basis with the lowest yields being the winning bids.
Only S&P downgraded Treasuries and they still had a very high rating; the other rating agencies did not lower their rating.
Interest rates were falling sharply fell during the period when S&P lowered its rating (8/5/11), with 30 year rates falling by over 100 basis points1.
Long story short the effects of government intervention and a weak economy over-shadowed any small effect that the rating downgrade from one rating agency might have had.
1. from 4.5% to below 3.5%
The phrase I'm hearing a lot from financial pundits talking about U.S. creditworthiness is that the U.S. is "the best looking horse in the glue factory". The U.S. Government has historically been the safest port in a storm from an investment perspective. As such, it has typically enjoyed very low interest rates, based on high demands for its perceived low risk.
Now, even when that reputation is being sorely tested by Congressional brinkmanship, investors are looking around, at a stagnant to still-recessing Euro Zone, an unstable Middle East, a cooling China, Japan still in the same position it's been in since the 90s, and returning to the United States' debt as being the best option in a less-than-ideal global market. We may be starting to look like a bad option compared to our position 10 or 20 years ago, but other options are still so much worse that even the downgrade from AAA to AA+ was shrugged off by the marketplace at large.
The only effect seen was in the most conservative of wealth-retention funds, the ones you're typically urged to move your retirement fund toward when you hit retirement age, in order to protect the nest egg while compensating for inflation. Firms offering these funds have their own bylaws concerning what's acceptable for monies invested in them, and a few did in fact reduce their holdings of T-debt or divest altogether as a result of the S&P downgrade, because their bylaws said that the fund had to be rated AAA by all of the Big Three ratings agencies. But, the resulting divestiture was a drop in the ocean compared to Chinese, Japanese and European investors clamoring for safe government debt, especially now that it was clear the U.S. would, in fact, make good on this debt. As such, the U.S. 10-year T-note remains the benchmark for effectively zero-risk investment in the global marketplace.
This position is about to be tested again; about a week from tomorrow, the Treasury predicts that the U.S. will max out its credit card (the self-imposed "debt limit" that Congress allows itself to accrue) on October 17, and there is virtually no movement by either party of government towards a resolution of the government shutdown, much less the debt ceiling. Beyond October 17, it's anyone's guess as to how far the daily incoming revenue stream of taxes, fees, fines, loan payments, recovered interest etc will keep up with the partially-furloughed government's various obligated payments falling due. Some estimates I've heard from financial pundits have said the government could continue to honor all its debts for up to a week after hitting the debt ceiling.
Beyond that, Obama will have to pick and choose what bills get paid. Whether he can legally do that is an open question; no President has ever had to pick and choose, and Obama is currently bound by conflicting laws, so he'll have to break one of them either by ignoring the debt limit and ordering the Treasury to make payments to all debts, or by staying under the debt limit and thereby choosing which debts don't get paid based on his political ideology instead of Congress' mandate. Now, Congress may try to enact legislation putting themselves in charge over choosing what obligations get paid, but such legislation requires either the President's signature (not a chance in hell) or a supermajority veto override (extremely unlikely, but possible if the President indicates he'll act in a way that the overwhelming majority of constituents would not like, such as suspending SS/Medicare/Medicaid, or suspending duty pay or supply shipments to active military).