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US markets continue nosedive as investors dump shares for bonds

The US bond market responds brilliantly to the S&P downgrade, but the world’s stock markets are the obvious victims.

Image: Michael Probst/AP

US STOCK MARKETS have continued their freefalls in early trading, with the Dow Jones, the S&P 500 and the Nasdaq indices all recording steep losses in the first trading since the US debt downgrade.

After an hour’s trading the Dow had dropped 3.3 per cent, the S&P 500 had shed just under 4 per cent, and the Nasdaq lost 4.25 per cent in a torrid morning’s trading.

The news was not all bad for the United States, however: given their first chance to react to last Friday’s unprecedented downgrade from Standard & Poor’s, the cost of borrowing for the US government actually fell, as demand for bonds surged.

As of 4pm Irish time, the US was being asked to pay 2.37 per cent interest on a 10-year loan – a drop of almost 0.2 per cent on the same price it would have paid on Monday, before the downgrade.

Traders attributed the drop to constant fears over the future of the stock markets, which had caused investors to dump shares and plump for the more long-term security usually offered by a treasury bond.

There were also mixed messages from Europe, where the FTSE 100 is poised to set a new record for consecutive losses, but where the cost of borrowing for under-pressure governments has also eased.

In a mixed morning’s trading, European markets initially opened brightly – with many, including the ISE in Dublin, initially opening in positive territory – but that optimism soon waned as markets across the continent all fell into negative territory.

The FTSE 100 index, at the time of writing, was down 151 points (2.9 per cent) – ready to record a new record, registering triple-digit losses in four consecutive days for the first time in its history.

Markets on the continent were not faring much better: the CAC 40 in Paris had dropped by 3.25 per cent, while the DAX in Frankfurt had dropped by 3.8 per cent.

In Greece the Athex index dropped 6 per cent, falling below 1,000 points for the first time in many years.

But the cost of borrowing for Europe’s main economies fell across the board, on foot of the ECB’s plan to purchase large amounts of Spanish and Italian bonds.

Italy – which had been on the verge of being priced out of the markets entirely – has seen the cost of a 10-year loan fallen by 0.8 per cent today alone, with the current yield standing at 5.28 per cent.

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Spain, meanwhile, will now pay 5.16 per cent for a 10-year loan – down by nearly 0.9 per cent on the price it would have paid at the close of business on Friday.

The costs of borrowing for more stable economies like the UK, France and Germany had risen earlier this morning, but as trading neared conclusion the cost of borrowing for all three governments had fallen slightly.

The cost of borrowing for the Irish government has also passed a welcome threshold: the hypothetical cost of a 10-year loan today fell below 10 per cent for the first time since April 20.

Just three weeks ago, a similar loan on the open market would have cost Ireland 14.22 per cent.

Earlier: European stock markets stabilise following ECB announcement

More: S&P’s “stunning lack of knowledge” shown in US downgrade

About the author:

Gavan Reilly

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