Relative tranquility returned to equity trading yesterday. The S&P 500 moved within a fairly tight range on Monday relative to recent history and closed down by only a small fraction vs. Friday. That’s progress next to last week’s turmoil: yesterday’s session was calm, cool and…clueless.
Clueless? Yes, if you were judging sentiment by what unfolded in the credit markets yesterday. In particular, a heightened state of fear gripped trading on the short end of the maturity spectrum. With a growing penchant to kick anything of less-than-stellar credit quality, investors rushed to safety by purchasing Treasury bills, the ultimate zone of security among paper assets. In the process, commercial paper of questionable quality took it on the chin.
The net result: the 3-month T-bill yield fell to around 3.12%, down from 3.76% on Friday’s close according to U.S. Treasury numbers. The commensurate rise in the price of a 3-month T-bill yesterday (bond prices move inversely to yields) has been widely reported as the biggest since the 1987 stock market crash. Even more striking is the fact that as recently as late July, 3-month T-bills yielded more than 5%.