A spectacular loss of confidence in the safety of financial assets is creating an unprecedented event that strategists are calling "a huge wave of panic."

Three-month U.S. T-bills are yielding 0.0304%, down from 1.50% on Monday as investors flock to the safest short-term assets.

"It's the equivalent of putting your money under your mattress. It's a huge wave of panic," said Carlos Leitao, chief strategist and economist at Laurentian Bank. "What you see is firms hoarding cash. Cash is not just king, it's emperor."

Leitao called the yield in T-bills "absolutely absurd". It means a $1,000,000 investment will pay $1,000,076 at maturity - far below the rate of inflation.

Strategists fear investors are liquidating less-safe investments, perhaps commercial paper or money market funds, and buying Treasuries.

Concerns about supposed safe investments may have been sparked after the oldest public money market fund in the U.S. lost value, or "broke the buck", on Monday. The Reserve Primary Fund declined after writing down $785 million in assets tied to Lehman Brothers.

"It's a run on the money markets," said T.J. Marta, fixed income strategist at RBC Capital Markets. "It's retail, people woke up and heard that a money market fund broke the buck and are liquidating."

At the same time, banks are refusing to lend to each other. The London interbank offered rate (libor) was fixed at 5.03125% for U.S. dollars and 4.64137% for Canadian dollars. The bank-to-bank lending rates are lower than a day ago, but still far higher above target than at any other time during the credit crisis.

Other measures of risk - like 2-year swap spreads and 3-month libor compared to 3-month overnight index swaps - are at record highs.

"It's getting very difficult to see how this does not hit the real economy," said Marta.

Strategists fear a scenario where declining asset prices cause forced liquidation and develops into a negative feedback loop.

Marta said the unprecedented moves could also weigh on computerized trading systems.

"We're afraid of black-box type systems. They would have gotten buy signals on spread and would have been blown out of the water by now," he said.

All data taken at 1:04 p.m. EDT.

By Adam Button and edited by Stephen Huebl
©CEP News Ltd. 2008