US Treasuries rallied and bill rates plummeted on Wednesday as unrelenting financial market upheaval, including another big stock market drop, fed demand for cash and ultra-low-risk investments. US stocks tumbled on Wednesday. The broad S&P 500 stock index fell 4.7 percent and the blue chip Dow dropped just over 4 percent as a spike in interbank lending rates fanned fears about the health of global markets.
Investors dumped financial shares. Morgan Stanley shares fell 24 percent and the other remaining major US investment bank, Goldman Sachs, fell nearly 14 percent. Money market funds were big buyers of Treasuries as they anticipated heavy redemption by investors worried about money market funds' exposure to securities issued by struggling insurer AIG, and by Lehman Brothers, which filed for bankruptcy two days ago, they said.
Late Tuesday the Reserve Primary Fund, a money-market mutual fund, fell below $1 a share in net asset value due to losses on debt issued by Lehman. The fund held $785 on in Lehman securities, which it revalued to zero.
Analysts at IDEAglobal said the Reserve Primary Fund was known as the industry's safe-haven money market fund. The fact that it fell below $1 a share in net asset value "is likely to cause investors to transfer their funds to bank money market accounts or Treasury securities," IDEAglobal said.
One-month T-bill yields traded at 0.03 percent, down 54 basis points from late Tuesday. They briefly slipped below zero percent, according to analysts, the lowest since the one-month bill was reintroduced in 2001.
In late trade, two-year Treasury notes were up 9/32 in price, their yields, which moves inversely to price, at 1.65 percent, down sharply from 1.79 percent late Tuesday. The risk-aversion move also pushed longer Treasury note yields lower. Benchmark 10-year debt rose 5/32 in price for a yield of 3.41 percent, down from 3.43 percent on Tuesday.