Investors, unmoved by the Fed's efforts to calm the credit markets last week, raced into government securities on Monday, resulting in the steepest drop in yields on short-term Treasury bills in almost a generation. That drop has in turn led to increased speculation that the Fed will soon cut the benchmark federal-funds rate. The willingness of investors to accept low yields for the security of government bonds suggests they remain fearful that subprime problems will seep into the wider securities market. On Friday, the Fed cut its discount window rate to 5.75% from 6.25%. It did not change the federal-funds rate, but said it is "prepared to act" as "downside risks to growth have increased appreciably." On Monday, investors snapped up three-month Treasurys, sending prices shooting up and yields down 66 basis points to 3.09%, their sharpest drop since January 1989. In midday trading, the three-month Treasury yield sank 125 basis points, a steeper drop than on the day of the October 1987 crash. The yield on one-month Treasurys slid Monday by 62 basis points to 2.35% after plummeting 175 points. The flight to quality was led by money market funds that are backing away from asset-backed commercial paper. "We're having a crisis of confidence," said ING Investment Management fixed-income head James Kauffmann. "[I]nvestors with the cash have no risk appetite at all." Kornelius Purps, fixed-income strategist at Unicredit Markets: "The problem in the credit market is far from over."
Sources: Wall Street Journal, Financial Times I, II, Bloomberg
Commentary: Flight To Safety Has Barely Started • Treasury Bill Yields Collapse • The Place To Be If The Fed Cuts Interest Rates
Stocks/ETFs to watch: AGG, DIA, SPY
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