Key interest rate falls as investors seek safety

Friday, January 9, 2015, Vol. 39, No. 2

NEW YORK (AP) — A barometer of Wall Street's anxiety flashed red on Wednesday, when traders rushed to the safety of U.S. government bonds.

The surge in demand for Treasurys knocked a key interest rate to its lowest level since May 2013.

"The U.S. Treasury market is the largest, most liquid in the world, so in times of stress money flocks to the U.S. market," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

The sharp drop in the 10-year Treasury yield reflects rising unease about the global economy. Slumping crude oil prices and a slowdown in Europe have stoked demand for U.S. government bonds, keeping long-term interest rates near historic lows. In the bond markets, yields fall as prices rise.

For investors, the one reliable comfort has been the U.S. economy's strength. But even that came under question Wednesday when the Commerce Department reported that Americans pared back their spending in December. The news sent the Dow Jones industrial average down more than 300 points.

"Many hopes were pinned on the notion that falling gas prices would open up consumers' wallets in December, the most important month for holiday sales," LeBas said.

As renewed anxiety swept through financial markets, investments and assets tied to economic growth fell and those used as hiding spots climbed. Copper, iron ore and other commodities plunged, while government bond prices jumped, pushing Treasury yields down.

The rate on the 10-year Treasury note, a benchmark for home loans and corporate borrowing, sank as low as 1.78 percent in morning trading before bouncing back. The yield on the 30-year bond dropped below 2.4 percent for the first time on record. When investors are nervous, they happily take little reward for little risk.

Low interest rates are a holdover from the 2008 financial crisis, when investors around the world sought safety in the Treasury market, driving bond prices up and yields down.

Since then, the European debt crisis, sluggish economic growth and a slew of other troubles have kept investors buying Treasurys, keeping a lid on yields and foiling predictions that rates will return to levels considered normal before the financial crisis. Over the past 20 years, the average rate for the 10-year is nearly 5 percent.