US Treasuries climbed on Tuesday after several Canadian investment trusts had trouble repaying short-term loans, further evidence that a crisis that began in mortgages has led to a wider credit tightening.
The development sent stocks tumbling and boosted government debt, as did news that Sentinel Management Group Inc had become the latest investment fund to try to prevent panicky customers from withdrawing their cash. Disappointing earnings results from Wal-Mart Stores Inc and Home Depot Inc were also beneficial to Treasuries since they signalled the housing downturn is finally catching up with consumers, whose spending powers about two-thirds of the US economy.
Benchmark 10-year notes were up 8/32 in price and offering a yield of 4.73 percent, down 3 basis points on the day and a full 60 basis points below a June high - the biggest two-month drop in yields in nearly a year. "Problems persist in the commercial paper and asset-backed markets," said Frank Hsu, director of global fixed income at Fimat. "Today it's Canada, but other countries, including the US, could have similar issues."
Credit rating agency DBRS said 17 Canadian issuers of asset-backed commercial paper had asked their liquidity providers for funding to pay for maturing notes, citing a market disruption. Failure to secure such funding could lead to defaults, DBRS said.
In yet another sign of rising risk aversion among global investors, spreads on two-year interest rate swaps gaped to 63.50, their widest level since the days following the September 11, 2001 attacks. Tuesday's developments were the latest in a flood of bad news emerging from the credit sector, much of it indicating that, just as investors had indiscriminately embraced risk over the past 10 years, they are now indiscriminately shunning it.
Even Goldman Sachs, arguably the most prestigious Wall Street bank, was forced on Monday to rescue one of its hedge funds with an infusion of $3 billion after the fund lost 30 percent of its value in just a week. Turbulence in hedge world could be exacerbated on Wednesday because investors face a deadline for notifying fund managers that they would like to jump ship.
The barrage of problems has sparked speculation that the Federal Reserve will have to intervene by cutting interest rates to keep markets liquid. Already, central banks around the world have flushed more than $400 billion of temporary funds into the financial system since Thursday, looking to keep transactions between banks running smoothly despite growing mistrust.
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