Investors stampeded into U.S. government bonds Thursday, driving the interest rate on the 10-year Treasury note as low as 1.54 percent, a record.
People were fearful that the U.S. economy might be hitting the skids at the same time as Europe is falling apart and the economies of China and India are slowing. When investors want to protect their portfolios they tend to plow money into U.S. government bonds, which are considered among the safest in the world because they are less likely to lose value and are easily tradable.
The record low rate beat the previous mark of 1.55 percent, which was set in November 1945. That was just after the end of World War II, when government price controls kept interest rates artificially low to preserve financial stability.
"The record today is even more dramatic when you consider that the Fed and Treasury had an explicit policy of keeping interest rates low after the war," said Campbell Harvey, finance professor at Duke University. Harvey said that when he conducts research on government monetary policy, he doesn't consider the interest rates on bonds prior to 1953 because the markets were heavily manipulated by the government then.
Investors were already on high alert after learning on Wednesday that Spaniards were pulling billions of deposits out of their banks, which could lead to larger bank runs and unhinge an already fragile debt situation in Europe.
A slew of worrisome U.S. economic data Thursday unnerved investors further.
Claims for unemployment benefits rose last week to a five-week high, and a closely watched index of factory output in the Chicago region fell for a third straight month to the lowest reading since September 2009. The Institute for Supply Management-Chicago warned that three consecutive declines have been associated with the onset of last seven national recessions.
Lastly, the government reported that the U.S. economy grew at an annual rate of 1.9 percent in the first three months of the year, slower than estimated earlier.
That report also contained other worrying trends. Growth in disposable income in the fourth quarter was revised downward to 0.2 percent from 1.7 percent in a previous report.
"There was this belief that the U.S. would be able to economically withstand the financial ramifications of a European fallout," said John Briggs, Treasury strategist at the Royal Bank of Scotland. "Today's economic numbers show that there are big cracks in the U.S. armor."
For investors, it seems like there's no place to hide. Previously fast-growing emerging economies are facing their own problems.
India said Wednesday that its economy grew at the slowest pace in nine years during the first three months of the year, while China's growth plunged to a nearly three-year low of 8.1 percent.
One bright spot for the average American is that the drop in Treasurys yields means even cheaper mortgage rates. The yield on the 10-year U.S. Treasury note is an anchor for borrowing costs throughout the economy. The drop in that yield, or interest rate, has pushed rates on 30-year mortgages to record lows for five weeks in a row.
Freddie Mac said that the average rate on the 30-year home loan fell to 3.75 percent this week. That's down from 3.78 percent last week and the lowest since long-term mortgages began in the 1950s.
On Thursday, yield on the benchmark 10-year note fell as low as 1.54 percent in the morning and ended the trading day at 1.56 percent, still sharply lower than 1.62 percent the day before.
These low yields have dramatically brought down the cost of U.S. government borrowing in recent months. The 10-year yield has averaged 4.7 percent over the past 20 years.
The price of the 10-year Treasury rose 49 cents for every $100 invested as demand for them rose.
In other Treasury trading Thursday, the yield on the 30-year bond dropped to 2.65 percent from 2.73 percent late Wednesday. Its price jumped $1.31 for every $100 invested. The two-year Treasury dropped to 0.27 percent from 0.28 percent from 0.30 percent.
The three-month T-bill paid a yield of 0.07 percent.