In a significant move, the yield on the 10-year Treasury note, which moves in the opposite direction of its price, hit its lowest point in more than three years, suggesting a weakening in investor confidence from levels that were already low.
All three major stock indexes have now dropped more than 10 percent from their highs, the generally accepted definition of a market correction.
Market specialists say investors are increasingly concerned that they still do not know how bad the fallout in the mortgage market will be, nearly a year after problems surfaced.
“The uncertainty is in the hidden land mines, if you will,” said Sam Stovall, chief investment strategist at Standard & Poor’s.
For the broader economy, the danger from the rush into Treasuries is that it will further limit the availability of credit to consumers and businesses, possibly slowing the economy even more. Banks and investors have already become more strict about lending to customers with blemished credit histories and are charging much higher rates to businesses with ratings below investment grade.
The yield on the 10-year Treasury note fell to 3.841 percent yesterday, from 4.001 percent late Friday and 4.403 a month ago. It was the biggest one-day drop in the yield in more than three years.
With financial stocks leading the way, the Standard & Poor’s 500-stock index fell 2.3 percent and the Dow Jones industrial average tumbled 237.44 points, or 1.8 percent, to 12,743.44.
Both indexes are down more than 10 percent from record closes on Oct. 9. It is the first time they have fallen that much since the bear market ended in October 2002. The Nasdaq composite index was off 2.1 percent, putting it more than 11 percent below its peak on Oct. 31. Much of yesterday’s decline came in the last hour and a half.
Stock markets were also down in Europe and Latin America, with Mexican and Brazilian indexes falling about 3 percent. Stocks opened sharply lower in Japan this morning.
Earlier in the day, the Federal Reserve Bank of New York tried to ease some anxiety by saying that it would offer a longer term for financing in the money market than it does usually. It will start with $8 billion tomorrow and the Fed said it would lend as much as is needed to keep overnight bank lending rates at its target of 4.5 percent. The bank also increased the amount of money securities dealers could borrow.
American and European central bankers have been trying to keep capital flowing smoothly in the main arteries of the world’s financial system. But they have been stymied by the uncertainty surrounding the quality of the investments that banks and brokerage firms created, sold and held during the credit boom.
Each time investors think that policy makers have effectively come to the rescue, another large institution reveals a portfolio tainted with shaky bonds.
“What they have done so far isn’t really fixing the problem; it isn’t easing credit,” Douglas Peta, chief market strategist at J.& W. Seligman, an investment firm in New York, said of the Fed and other central banks.
Yesterday, investors appeared to be focused on news that Citigroup, the world’s largest bank, is considering more layoffs. Citigroup shares fell 3.2 percent, to $30.70; it is down nearly 45 percent for the year. After hours, Citigroup shares dropped another 2.9 percent to $29.80. Another large bank, HSBC, said it would help rescue two investment vehicles by taking $45 billion in assets onto its balance sheet to avoid their being sold at current prices.
Banks have already written off about $50 billion in bonds tied to home loans, and some economists estimate the total losses could be $400 billion.
While the Federal Reserve has cut its benchmark interest rate twice in recent months, by 0.75 percentage point, the actions have not helped lower the cost of borrowing for most banks and financial institutions.
Policy makers meet again on Dec. 11, but they have signaled in several public appearances that they do not see a need to cut interest rates further.
One indication that the Fed’s rate cuts are not easing the flow of capital can be seen in the premium that investors are demanding to hold risky assets. High-yield debt is fetching a yield of 10.46 percent, up from 8.91 percent at the start of October. In other risky assets like bonds tied to subprime mortgages there is little to no trading going on.
“There is so much uncertainty and almost paranoia among certain market participants that market moves tend to be manic at times,” said Derrick Wulf, a portfolio manager at Dwight Asset Management, a bond trading firm based in Burlington, Vt. “Today we saw credit spreads widen across asset classes.”
Shares of finance companies and discretionary consumer products have taken the biggest beatings recently. But other sectors like technology where companies, especially semiconductor makers, have reported slowing growth have also started to slip. (Technology shares remain up for the year, whereas the overall S.& P. 500 is down 0.8 percent.)
“Until someone can quantify how bad the problem is, there will be a fear factor,” said Scott Black, president of Delphi Investments, an investment firm in Boston. “And nobody wants to own financial stocks.”