U.S. Treasuries climbed on Tuesday after several Canadian investment trusts had trouble repaying short-term loans, further evidence that a crisis that began in mortgages has led to a wider credit crunch.
The development sent stocks on a tumble and boosted government debt, as did news that Sentinel Management Group had become the latest investment fund to prevent panicky customers from withdrawing their cash.
Disappointing earnings results from Wal-Mart and Home Depot were also beneficial to Treasuries since they signaled the housing downturn is finally catching up to consumers, whose spending powers about two thirds of the overall economy.
Benchmark 10-year notes were up 8/32 and offering a yield of 4.73 percent, down three basis points on the day and a full 60 basis points below a June high -- the biggest two-month drop in yields for nearly a year.
Problems persist in the commercial paper and asset-backed markets, said Frank Hsu, director of global fixed income at Fimat. Today it's Canada, but other countries including the U.S. could have similar issues.
Credit rating agency DBRS said 17 Canadian issuers of asset-backed commercial paper had asked their liquidity providers for funding to pay for maturing notes, citing a market disruption. Failure to secure such funding could lead to defaults, DBRS said.
This was only the latest in a flood of bad news emerging from the credit sector, much of it indicating that just as investors had indiscriminately embraced risk over the past ten years, they are now indiscriminately shunning it.
Even Goldman Sachs, arguably the most prestigious Wall Street bank, was forced on Monday to rescue one of its hedge funds with an infusion of $3 billion, after the fund lost 30 percent of its value in just a week.
Turbulence in hedge world could be exacerbated on Wednesday, since investors face a deadline for notifying fund managers that they would like to jump ship.
The barrage of incidents has sparked speculation that the Federal Reserve will have to intervene by cutting interest rates in order to keep markets liquid.
Already, central banks around the world have flushed more than $400 billion of temporary funds into the financial system since last Thursday, looking to keep transactions between banks running smoothly despite growing mistrust.
Many experts say the Fed would have to see clear evidence that these financial debacles are having a pronounced macroeconomic impact before slashing rates, particularly since inflation looks stubborn in some areas.
But pessimists say officials need look no further than the press release that accompanied Wal-Mart's earnings statement, which said that many customers were running out of money toward the end of the month.