Flight to quality heats up on world markets overnight

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Investors are running for the hills by opting for the relative safety of the fixed-income securities deemed safest as the turmoil in Europe continues, fanning the fire of concern over the risk of a euro break-up.

"It's not Greece leaving the euro that is the major issue," John Bearman, chief investment officer at Thomas Miller Investment, told Reuters. "It's the domino effect."

US bonds are considered the world's safest and today's auction of US$13 billion of 10-year Treasury Inflation-Protected Securities attracted strong demand. The sale drew a yield of negative 0.391 per cent, compared with a forecast of negative 0.329 per cent, according to a Bloomberg News survey of nine of the Fed's 21 primary dealers. The previous record was negative 0.089 per cent on March 22.

"There's this flight to quality around the globe," Thomas Tucci, head of US government-bond trading at CIBC World Markets in New York, told Bloomberg. "A lot of people have been caught off guard."

Equity markets on both sides of the big pond suffered yet another day as indications of deepening trouble in Greece and Spain as well as disappointing US economic data provided a double whammy to investors already on the edge. The Spanish government denied a report that Bankia was suffering from a run on deposits as official data showed the nation has fallen back into recession.

Europe's Stoxx 600 Index ended the session with a 1.1 per cent drop for the day, sliding for the fourth day in a row. National benchmark indexes declined in all 10 western European markets open today, according to Bloomberg.

In late afternoon trading in New York, the Dow Jones Industrial Average dropped 0.74 per cent, the Standard & Poor's 500 Index fell 0.97 per cent and the Nasdaq Composite Index shed 1.36 per cent. Weak consumer confidence data hurt sentiment.

"Investors are de-risking," Tim Hoyle, the director of research at Radnor, Pennsylvania-based Haverford Trust, told Bloomberg. "There's economic data weighing today, there's concern about a domino effect in Europe. It's not only about the Greeks pulling out. It's about what happens to Portugal and Spain and Italy."

Spain's borrowing costs soared in today's debt auction.

"This ... fits the pattern of recent sales, with the Spanish treasury successfully getting its supply away but at ever-higher yields," Richard McGuire, rate strategist at Rabobank in London, told Reuters. "This unfavourable trend looks set to remain firmly in place ... Ultimately, this ratcheting up of yields will likely require some form of outside intervention."

Moody's Investors Service is set to downgrade the credit ratings of Spanish banks later today, Bloomberg News reported, citing two people with knowledge of the situation, who asked not to be identified because the decision hasn't been announced.

As if on a planet of its own, Facebook looks set to price its initial public offering at the top of a target range that was already raised from an earlier one. The company is close to pricing its initial public offering for at least US$38 a share and may reach US$39, according to the Wall Street Journal.

Facebook is scheduled to price its IPO today.