T-bill yields dive as cash seeks haven
Wall Street’s rush to safety quickened Monday, despite the Federal Reserve’s attempt late last week to soothe investors’ frayed nerves.
The interest yield on three-month U.S. Treasury bills plunged to the lowest level in more than two years as investors continued to pile into the super-safe securities -- a sign that financial markets remained on edge even after the Fed cut a key interest rate Friday.
If T-bill interest rates keep dropping, the central bank may have to take more dramatic steps to calm markets, some analysts say.
In other trading Monday, U.S. stock indexes closed mixed, failing to extend their powerful rally Friday that followed the Fed’s surprise rate cut. The Dow Jones industrial average edged up 42.27 points, or 0.3%, to 13,121.35.
“There’s still a lot of fear out there, a lot of uncertainty,” said Marc Pado, a market strategist at brokerage Cantor Fitzgerald.
Investors have been spooked by weeks of stock and bond market tumult fueled by a growing unwillingness on the part of lenders to extend credit -- a problem rooted in the housing sector’s woes.
Amid fears of a deepening credit crunch, many big and small investors alike are snapping up short-term Treasury bills, considered the safest securities available.
As demand surges for T-bills, the government doesn’t have to pay as much to satisfy buyers.
On Monday, the government sold new three-month T-bills at an annualized yield of 2.92%, down sharply from 4.76% just a week earlier and the lowest since May 2005.
More striking, the yield on the previously issued three-month T-bill plunged as low as 2.45% on Monday, compared with 3.88% at the close of trading Friday. Some analysts said that drop rivaled what occurred amid the panic unleashed by the stock market crash of October 1987.
The Treasury sold six-month bills Monday at a yield of 4.10%, down from 4.90% a week earlier and the lowest since October 2005.
Investors’ willingness to accept such depressed interest rates, instead of seeking out higher yields on corporate or other short-term IOUs, “shows the credit markets are still dysfunctional,” said Tony Crescenzi, bond market strategist at investment firm Miller Tabak & Co. in New York.
If lenders and investors don’t loosen up soon, the Federal Reserve may be forced to take more significant steps to come to the financial system’s rescue, Crescenzi said.
That could mean a cut in the Fed’s most important interest rate, the so-called federal funds rate, which directly affects other rates throughout the economy. The central bank has held that rate at 5.25% since mid-2006.
The Fed sought to calm markets on Friday by cutting its discount rate, the price that banks pay for borrowing directly from the Fed, to 5.75% from 6.25%. The central bank made the extraordinary move to encourage banks to keep credit flowing in the financial system.
“Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth,” policymakers said in a statement before markets opened Friday.
Wall Street has been particularly concerned about investors’ dwindled interest in buying commercial paper issued by financial companies, a big part of the market for short-term IOUs.
Some analysts said the ongoing rush into Treasury bills was being led by money market mutual funds, which hold $2.7 trillion in assets, including commercial paper.
Money funds that restrict their investments to short-term government debt had a $50-billion inflow of fresh cash the final three days of last week as investors sought a haven, according to IMoneyNet Inc., which tracks the funds.
That has forced many of those managers to bid aggressively for T-bills, analysts say.
What’s more, money funds that invest in a broad mix of securities have been trying to boost their stakes in Treasury issues so they have something they can quickly sell in a pinch, said Pete Crane, head of Crane Data, another fund-tracking firm.
“They’re raising their liquidity positions for fear of investor redemptions,” he said.
Those funds had a net outflow of $21 billion in the final three days of last week, IMoneyNet said.
The hunger for T-bills is a boon for the government, which saves on interest costs as rates plunge. But the crash in yields hurts small investors, particularly retirees, who rely on T-bills for income. Investors who buy T-bills at current rates are getting 38% less interest income than people who bought just one week ago.
Among Monday’s market highlights:
* The stock market opened with modest gains after Friday’s rally, when the Dow zoomed 233 points, spurred by the Fed’s rate cut. The market then fell into the red, led by financial-company shares -- the sector that has been hammered the most this year on credit-crunch fears.
The Dow was off as much as 97 points at midday before rallying back.
Among broader indexes, the Standard & Poor’s 500 slipped 0.39 of a point to settle at 1,445.55. The Nasdaq composite added 3.56 points, or 0.1%, to 2,508.59.
* Winners outnumbered losers by about 3 to 2 on the NYSE, but winners had only a small edge on Nasdaq. Trading volume was off significantly from last week’s record levels, which some analysts said reflected a lack of buying interest.
* Asian stock markets had rallied sharply Monday before Wall Street opened, taking their cues from Friday’s U.S. market rebound. Japan’s Nikkei-225 index jumped 3% after diving 5.4% on Friday. The South Korean market was up 5.7% and the Singapore market gained 6.1%.
* In the U.S. financial sector, Countrywide Financial slid $1.62 to $19.81, Goldman Sachs dropped $2.24 to $172.76 and National City was off $1.47 to $28.21.
* Some industrial issues continued to bounce back, reflecting investors’ hopes that global economic strength may buoy the U.S. manufacturing sector. Caterpillar rose $1.41 to $74.05, Deere jumped $3.66 to $128.27 and Parker-Hannifin rallied $2.18 to $97.43.
* Long-term Treasury bond yields declined, although not as sharply as shorter-term yields. The 10-year T-note ended at 4.63%, down from 4.68% on Friday and the lowest since early May.
* Crude oil prices eased, with near-term futures in New York down 86 cents to $71.12 a barrel.
