Panic in world credit markets reached historic intensity yesterday, prompting a flight to safety of the kind not seen since the second world war.
Barometers of financial stress hit peaks across the world. Yields on short-term US Treasuries reached their lowest level since the London Blitz, lending between banks in effect halted and investors scrambled to pull their funding from any institution or sector whose future had been called into doubt.
The turbulence claimed another British victim in HBOS. The largest mortgage lender is to be taken over by Lloyds TSB in a £12bn deal after the government pressed it into talks having seen its share price halve this week.
The $85bn emergency Federal Reserve loan for AIG, the troubled insurance group, announced on Tuesday night, failed to curb the surge in risk aversion. Instead, markets were hit by a fresh wave of anxiety.
Speculation mounted that the Federal Reserve, which refused to cut rates on Tuesday, could be forced into an embarrassing U-turn – possibly in co-ordination with other central banks. Amid the financial chaos, traders were pricing in at least a quarter percentage point cut by the end of October.
One cause for fear came when shares in a supposedly safe money market mutual fund fell below par value because of losses on Lehman Brothers debt. This raised the risk that retail investors in other such funds could panic and pull out their money.
All thought of profit faded as traders piled in to the safety of short-term Treasuries.
Financial Times, The Times