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Spooked investors flee stocks and buy what the Fed is buying: Treasury bonds

August 11, 2010 | 11:27 am

Fear is gripping financial markets worldwide Wednesday as investors focus on another batch of downbeat economic data.

Not surprisingly, cash is again fighting to get into the asset endorsed by the Federal Reserve: U.S. Treasury bonds.

The yield on the 10-year T-note has tumbled to a fresh 16-month low of 2.70% from 2.77% a day earlier.

The  Fed on Tuesday said it would resume buying Treasuries to try to help the economy by putting more downward pressure on longer-term interest rates in general.

Thescream On Wednesday, investors also piled into government bonds of Germany, Britain and Canada, among others -- and bailed out of stocks nearly everywhere.

Equity markets tumbled 2.7% in Japan, 2.1% in Germany and 2.4% in Britain.

On Wall Street, the Dow Jones industrials were off 225 points, or 2.1%, to 10,419 at about 11:30 a.m. PDT. Things were worse than that in the broader market: The average New York Stock Exchange stock was off 3%, on track for the biggest loss since June 29.

Weaker Chinese industrial output, a slower growth forecast for  Britain and a wider U.S. trade deficit in June all weighed heavily on investors, raising new fears that the global economy could slow enough to tip back into recession.

The Fed arguably didn’t help confidence by saying Tuesday that it expected the U.S. economy’s recovery to be "more modest in the near term than had been anticipated."

Some Fed critics had warned that the central bank would only further undermine faith in the economy by launching a new program to buy Treasury bonds.

John Silvia, an economist at Wells Fargo, said it wasn’t fair to blame the Fed for the stock market’s new slide. “They were just being honest” in their economic assessment, he said.

Still, he said, the Fed obviously is helping to herd more investors into Treasury bonds.

With its new commitment to buy billions of dollars worth of Treasuries every month, “They’re telling everybody that the price of that asset is going up,” Silvia said.

-- Tom Petruno

Image: Edvard Munch's "The Scream"