The Flight to Safety…For Now

As money market funds bailed out of commercial paper over the past couple of weeks, their money managers turned to government guaranteed debt. In particular, 90-day U.S. T-bills.

With demand for U.S. T-bills so great, the yields on these government guaranteed instruments had their biggest drop since the stock market crash of 1987 — almost two decades ago. While the yield on U.S. 90-day T-bills were about 4.7% in early August, today their yield is a paltry 3.7%.

Hopefully, my readers heeded my advice over the past year and were already invested in short-term T-bills.

Like all forms of investments, the bigger the demand, the lower the return. During the leverage buyout frenzy that took control of the stock market during most of 2007, all we saw was higher stock prices as demand for stocks pushed up prices. Now, with investors having bailed from stocks to safety, T-bills are in demand… and their return is diminishing.

Slowly, investors will move back into stocks and T-bill yields will go back up. But next time we have a run on the stock market (and I don’t expect that time to be too far away), I believe it will be gold bullion that will experience the run-up in price.

Think about this…

Investors bailed from stocks over the past few weeks because the subprime problem extended to other parts of the lending business. The subprime mess can be directly related to Americans buying homes they really didn’t qualify for. What institution wants to buy a portfolio of home loans from “iffy” borrowers?

Now this…

Are not the people issuing U.S. T-bills in financial trouble? The U.S. government has the biggest deficit in its history right now. We need $2.0 billion a day more to operate our government than our government takes in. How long will that continue? Next time, U.S. T-bills may not be the flight to safety. For foreigners who see the Greenback softening against other world currencies, U.S. T- bills may no longer be their alternative.

NEWSFLASH: Capital One Financial is closing its GreenPoint Mortgage unit because of poor demand from investors who buy packaged residential home mortgages. And 1,900 people will lose their jobs. Capital One is not the first, nor will it be the last, of home loan originators to close their doors.