Panic in U.S. money markets!

Martin and Mike here with an urgent afternoon update.

Despite the Fed’s biggest cash infusions since 9-11 â€¦

Despite the Fed’s surprise discount rate cut on Friday â€¦

And despite its desperate efforts to persuade big banks to borrow the money â€¦

Panic Is Now Hitting
U.S. Money Markets!

We are witnessing the most dramatic â€” and potentially most consequential â€” panic rush to safety in modern history.

We can’t tell you exactly what set off today’s new fire. No one knows yet.

But we can clearly see the smoke. It’s all over the money markets!

Here’s what’s happening:

Some of the world’s largest and most “professional” investors, so cozy in their complacency just days ago, are dumping short-term loans (commercial paper) like hot potatoes, especially those backed by mortgages.

And with virtually no one willing to buy them, the rates that borrowers have to pay on these loans have gone through the roof.

Meanwhile, investors are so utterly desperate for a safe haven, and so anxious to throw more money into short-term Treasury bills, they’ve caused one of the greatest plunges in T-bill rates of all time â€¦

The 1-month T-bill rate has plunged from 4.52% last Tuesday to as low as 1.25% today. That’s not a typo! It was actually down by more than THREE full percentage points in just four trading days!
Today alone, the 3-month T-bill rate was down by over one full percentage point before recovering a bit.
The all-critical spread, or difference, between the 1-month T- bill and 30-day commercial paper rates is now as much as THREE times bigger than it was just a few days ago â€” another confirmation of panic in these markets.

Things are happening so fast, even the nation’s leading news organizations are having trouble keeping track.

At noon today, for example, Bloomberg sent out a release saying that today’s decline in the 3-month T-bill rate was the biggest since the Crash of ’87. Then, a half hour later, they quickly followed up with another release saying that it’s actually the biggest decline since they started collecting data in 1983.

We’ve looked back at our records and we can tell you flatly: In percentage terms, today’s decline in Treasury-bill rates is the largest since World War II, another indication of how severe this panic has become.

Here’s what all this could mean to you â€¦

First, even investors in the shortest-term debt market are shunning any kind of loans with risk attached to them. They don’t want sub-prime paper. They don’t even want prime paper. They just want ultimate safety â€” short-term Treasury bills backed by the full faith and credit of the U.S. government.

Your action: Stick with your stash of safe, conservative investments we’ve been recommending all along.

Second, if you’ve got a chunk of your nest egg in one of our favorite short-term Treasury-only money funds, good. It means you already own what nearly everyone else now wants.

But if your fund has an average maturity of just a few days, don’t be surprised if your yields start dropping sharply very soon.

One way to help offset that drop: Favor Treasury-only money funds that have a longer average maturity. Examples: MTB U.S. Treasury Money Market Fund (VSTXX) with an average maturity of 45 days and Weiss Treasury Only Money Market Fund (WEOXX) with an average maturity of 51 days.

Third, don’t be surprised if the panic in the U.S. money markets soon becomes a panic in the U.S. stock market. Heck, if investors think normally-safe commercial paper is so risky, why should they believe stocks are any less risky?

Your action: Use stock market rallies as an opportunity to unload any stocks you’re seeking to get rid of.

Fourth, with the yield on U.S. Treasuries plunging, watch out for another, even more severe plunge in the U.S. dollar, especially against the Japanese yen.

Your action: For protection and oft-dramatic profits, consider buying foreign currencies. Years ago, that would have been very cumbersome. But fortunately, today it’s easy as buying almost any security traded on the NYSE or Amex. (See this morning’s Money and Markets for details.)

Fifth, brace yourself for more. Today’s panic in the money markets is just a sampling of what’s possible in the days ahead.

Best wishes,

Martin and Mike

About Money and Markets

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, and Julie Trudeau.

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