The bond markets were turbulent again Thursday, as investors anxious about the congested financial system dumped their money into the 3-month Treasury bill — considered one of the safest investments around.
The moves into low-yielding T-bills, which followed intense buying on Wednesday, show that money market and other fund managers are frantic to keep their clients' money out of anything that might plunge in value.
The flight was also a symptom of extreme tightness in other markets that banks and hedge funds use to stash cash for a short period of time — notably, the repo, or repurchase markets, which are temporary loan markets. Because these markets have seized up, the Treasury market is one of the few places available for short-term, fixed-income assets.
Thursday's promise by the world's central banks to inject the global financial markets with as much as $180 billion initially put a damper on Treasury buying. But trading was erratic as investors responded to any bit of news about the financial system.
For example, buying picked up when Putnam Investments suddenly closed its $15 billion money-market fund after institutional investors quickly pulled out their cash. Putnam cited "marketwide liquidity issues," and said the fund had no exposure to financial firms Lehman Brothers Holdings Inc., Washington Mutual Inc. or American International Group Inc.
The level of uncertainty in the markets remains higher than it's been in anyone's memory, said John Spinello, bond strategist at Jefferies & Co., who has been in the business for 30 years.
"I don't even think the authorities know what the end game is," Spinello said. "Everyone's very tired, both physically and mentally ... Things change from day to day, hour to hour, minute to minute. It's survival to keep capital, as opposed to increase capital."
And when investors are fearful of taking risks, the economy suffers. Corporate credit spreads — or the difference between the yield on a corporate bond and a government bond — are approaching levels not seen since after World War II, noted Citigroup economist Steven Wieting. That means it's going to be very expensive for companies to borrow money, which is essential to growing and maintaining a business.
By midafternoon on Thursday, the 3-month Treasury bill's yield was at 0.07 percent, meaning that after three months, that investment will earn that amount. The yield was up from 0.02 percent late Wednesday, but down sharply from 1.60 percent just a week ago.
"There's no sense today that everything is done, everything is fine," said David Ader, bond strategist at RBS Greenwich Capital in Greenwich, Conn.
On Wednesday, demand for the 3-month Treasury bill had soared so high that the yield briefly dipped into negative territory, which means a bill holder would take a small loss at maturity. To many investors a small loss is preferable to the massive declines seen this week on Wall Street.
According to Los Angeles-based Global Financial Data, the last time the 3-month T-bill was at or below zero was January 1940, in the early stages of World War II.
The rush to T-bills occurred after a wave of troubling developments on Wall Street: the bankruptcy of investment bank Lehman Brothers Holdings Inc., the absorption of Merrill Lynch & Co. by Bank of America Corp, the $85 billion government bailout of the insurer American International Group Inc., and a money-market fund that had exposure to Lehman and "broke the buck."
When a fund "breaks the buck," it means the fund failed to maintain assets of at least $1 for every dollar its clients invested.
Investors are nervously awaiting resolution on other major financial institutions, notably investment bank Morgan Stanley and thrift bank Washington Mutual Inc., which are in talks with potential buyers. Because one company's downfall can trigger problems for another, market participants have limited ways to predict the risk of various companies and assets tied to them. This means that no one wants to lend.
"Liquidity has never been in shorter supply in the credit markets during this painful
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