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Bonds scream, Serenity now!

Wednesday, September 17, 2008

As rough as it is on the stock market on Wednesday, a lot of investor attention has shifted toward the bond market, where an all-out flight to safety has translated into plunging bond yields on short-term U.S. government bills.

The yield on the three-year bill fell as low as 0.233 per cent, according to Bloomberg News, the lowest rate since at least 1954. Bespoke Investment Group believes the rate is the lowest since the Great Depression. Just this Monday, the yield was about 1.5 per cent. And the yield was as high as 4 per cent last October.

Observers are also watching closely as the TED spread – the difference between the yield on the three-month Treasury bill and the LIBOR interest rate, a key measure of financial stress – has spiked to 2.76 per cent, above previous peaks over the past year and well above the average spread of just 0.5 per cent. As the Calculated Risk blog noted, the higher the spread, the greater the perceived credit risks.

Meanwhile, the Wall Street Journal noted that the TED spread is at its widest since the stock market crash of 1987, and indicates that banks have no interest in lending to one another.
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