NEW YORK - The panic in world stock and credit markets has triggered a flight to safety of the kind not seen since the second world war.
As barometers of financial stress hit record peaks across the world, frenzied investors around the world frantically moved their money into the safest investments, like Treasury bills.
Worried investors were are snapping up three-month Treasury bills with virtually no yield and they pushed gold to its biggest one-day gain in nearly 10 years on Wednesday. The precious metal rallied some US$90 an ounce as volatility on the equity markets and fears over the outlook for the financial sector sparked a flight to safety.
'This is stunning, and testimony to these historic times,' said Mr Alan Ruskin, chief international strategist with RBS
Greenwich Capital, in a note. 'It is clear that fear and a desperate search for a hedge against risk has trumped all.'
Analysts said this flight to safety, away from other kinds of debt as well as stocks, could cause serious damage to an already weakened economy by making it more expensive for businesses to finance their day-to-day operations.
Some economists worry that a psychology of fear has gripped investors, not only in the United States but also in Europe and Asia, said The New York Times.
While investors' decision to protect themselves may be perfectly rational, the crowd behaviour could cause a downward spiral that has broader ramifications.
'It's like having a fire in a cinema,' said Mr Hyun Song Shin, an economics professor at Princeton. 'Everybody is rushing to the door. You are rushing to the door because everyone is rushing to the door. Clearly, as a collective action, it is a disaster.'
Faltering confidence could have an infectious effect in Asia, whose savings have essentially bankrolled America for decades.
'Asia, perhaps more than other markets, is a bit more volatile, a bit more based on sentiment,' said Mr Dan Parr, the head of Asia-Pacific for brandRapport, a marketing consulting agency with an office in Hong Kong.
'It doesn't take much for the man on the street to become very, very concerned.'
In early Japan trading, the major stock index fell 3 per cent.
Asian stocks fell, with shares outside Japan down 4 per cent on Thursday, as emergency actions by central banks and governments around the world failed to ease a crisis that has investors fleeing to government bonds or sticking with plain cash.
European stock market futures were down slightly, pointing to at least a temporary staunching of three days of heavy selling.
But the seismic shift on Wall Street this week continued to create a sense of global panic, with frenetic consolidation in the financial sector in the world's largest economy, sending the MSCI all-country world stocks index to its lowest since November 2005.
Investors have piled into short-term US Treasuries and bailed from money market funds, pushing yields down close to zero. The cost of insurance against default or restructuring in the credit default swap market soared to record levels in Asia, reflecting deep-seated unease.
In the past 24 hours, No. 2 US investment bank Morgan Stanley and top US savings and loan Washington Mutual were reportedly up for sale, and Britain's Lloyds TSB agreed to buy rival HBOS, reflecting the unstable landscape that has contributed to gold's 18 per cent surge in the last week.
'Credit fears have now reached a climax. It's presumptuous to assume it would end in one day,' said Mr Harushige Kobayashi, head of research department at broker Securities Japan.
'The market ignores fundamentals and is now 95 per cent driven by psychological factors.'
The Chicago Board Options Exchange Volatility Index or VIX, Wall Street's main barometer of investor fear, had its highest close in almost six years on Wednesday.
Another measure of investor distaste for risk, the TED spread of 3-month interbank lending rates over 3-month US Treasury bill yields blew out to more than 300 basis points, far exceeding levels reached during the US savings and loan crisis of the 1980s.
Fear of the unknown has also pushed investors to government bonds, chasing safety above all else, even yield. US Treasury bill yields inched toward zero.
One-month Treasury yields dipped to 0.010 per cent, from 0.040 per cent late in New York on Wednesday, when it may have actually traded at negative levels, dealers said. Yields from 1-month to 6-months were less than 1 per cent.
'This corner of the cash market is significant because its a rich, deep pool of liquidity that is tapped by insurance funds, banks and brokers. Stress here signals another impediment to vital liquidity,' said Mr Brett Williams, credit analyst with BNP Paribas in Hong Kong.
Investors are quickly learning that in the current crisis almost nothing is safe, even US money market funds.
Late on Wednesday, Moody's Investors Service sharply downgraded the Reserve Primary Fund after it fell below $1 a share in net asset value due to losses on debt issued by Lehman Brothers, which has filed for bankruptcy protection.
Crude oil has not been immune to the large-scale liquidation in markets to feed the need for cash. The October future slipped $1 to $96.13 a barrel after jumping $6 on Wednesday. -- REUTERS.