European fears send investors fleeing to T-bills

The yield on 10-year Treasury bills dropped below 3% in New York last night as investors rushed to safety fearing re-financing problems in Europe and weak US data.

The 3% barrier indicates a level of fear similar to that seen at the bottom of the market in March 2009.

The flight to cash was accompanied by falls in equity markets around the world. Aside from a difficult auction by the Italian government the main fear stemming from Europe relates to the need of European banks to repay some €442 billion of one-year loans from the European Central Bank (ECB) this Thursday. The debt - issued at dirt cheap prices - will likely need to be replaced by more funding directly from the central bank.

Concern that full re-financing will be difficult has increased after Spanish banks began lobbying the ECB to extend its financing scheme. Although no major banks went on the record, they privately briefed the international press that the bank should begin lending on longer durations than the current three-month paper that is replacing the special liquidity measures, which run out on Thursday.

The immediate re-financing concern for European banks comes in the context of a general sense of discontent around medium-term bank financing, which has increased speculation that central banks will soon acknowledge the need for more loosening.