A ‘massive’ rush for safety as financial markets crater

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There’s a sense of desperation in the credit markets today that exceeds anything many traders have experienced.

The most telling number: A three-month U.S. Treasury bill purchased right now would pay an annualized yield of just 0.1%, down from 0.7% on Tuesday and 1.47% on Friday.

That shows how rabid demand is by banks and other big investors for ultra-safe securities. They don’t want to lend to each other. They just want to hoard cash.

What’s more, money market mutual funds are said to be rushing to buy short-term Treasuries to prepare for potential investor redemptions, after a large New York money fund on Tuesday became only the second fund ever to ‘break the buck’ (fall below $1 a share) because of losses on Lehman Bros. IOUs.

‘There’s a massive safe-haven bid,’ said Tom DiGaloma, who trades Treasuries for brokerage Jefferies & Co. ‘It’s massive risk-reduction’ across the banking system.

Another telling number: Gold was up $67.20, or 8.6%, to $847.70 an ounce in futures trading at about 10:50 a.m. PDT. Not knowing where else to turn, some investors are trading paper money for hard money.

The stock market is cratering. The Dow industrials were down 354 points, or 3.2%, to 10,704.

The government’s $85-billion rescue of insurance giant American International Group, announced late Tuesday, obviously didn’t make the financial markets feel any better.

‘Nothing here seems to make anybody feel better,’ said David Resler, economist at Nomura Securities International in New York.

This crisis is rooted in the housing market, but now Wall Street has turned on itself. Major banks, brokerages, hedge funds and other big players don’t want to take the chance of being on the hook to another institution if they feel there’s even a remote chance that that institution can’t pay what it owes.

‘Everybody’s trying to reduce credit exposure to all the institutions that they feel aren’t viable,’ DiGaloma said.

And that apparently is a long list, and getting longer.

After the failure of Lehman Bros. over the weekend, and the emergency takeover of Merrill Lynch & Co. by Bank of America Corp., traders now are turning on the two remaining independent investment banks -- Morgan Stanley and Goldman Sachs Group. Morgan shares were down $11.09, or 39%, to $17.61 at about 10:50 a.m. PDT; Goldman was off $32.81, or 25%, to $100.20.

Investors have always been told that panics are a great buying opportunity. But the attitude today clearly is: You go first.