MarketWatch was calling it a “bloodbath”, and so it would seem…I need to look over Barton Biggs book, Wealth, War, and Wisdom again tonight…

Source: FT.com

The panic in world credit markets reached historic intensity on Wednesday prompting a flight to safety of the kind not seen since the second world war.

Barometers of financial stress hit record peaks across the world. Yields on short-term US Treasuries hit 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 $85bn emergency Federal Reserve loan for the troubled insurance giant AIG, announced on Tuesday night, failed to curb the surge in risk aversion. Instead, markets were hit by a new wave of anxiety.

One cause for fear came when shares in a supposedly safe money market mutual fund fell below par value – or “broke the buck” – due to 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 was abandoned as traders piled in to the safety of short-term Treasuries, with the yield on three-month bills falling as low as 0.03 per cent – rates that characterised the “lost decade” in Japan. The last time they were this low was January 1941.

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