US and European stock markets steadied today, while bond prices rose, pushing the two-year Treasury note's yield down to 18-month lows as investors sought refuge from the credit sector's troubles in the relative safety of government debt.
The dollar also benefitted, as US investors continued to pare back their exposure to risky trades overseas, bringing cash back home into the safety of deposits.
US stock indexes rose modestly, with the Dow Jones industrial average pausing after a tumble of nearly 1,000 points from a record high above 14,000 set on July 17th.
But investors remained nervous, reflecting continued worries that a crisis in the subprime mortgage sector - originally sparked months ago by a steep rise in foreclosures - has not yet run its course.
The Dow Jones industrial average was up 3.58 points, or 0.03 per cent, at 13,032.50, after falling below 13,000 in early trade, its lowest in more than 3-1/2 months.
The Standard & Poor's 500 Index was up 2.17 points, or 0.15 per cent, at 1,428.68. The Nasdaq Composite Index was up 3.40 points, or 0.14 percent, at 2,502.52.
Shares of Countrywide Financial Corp., the largest US mortgage lender, dropped as much as 10 percent after Merrill Lynch downgraded the stock to "sell" from "buy" and said bankruptcy may be possible if liquidity worsens. Countrywide later recouped some of those lossess, but was down 4.4 percent at $23.39 in midday trading on the New York Stock Exchange.
The crisis in the US sub-prime mortgage market has blown out credit spreads, slashed the returns of many hedge funds, and made it difficult for issuers of short-term debt such as commercial paper to roll over their loans.
The credit crunch also has raised concerns that financing for big mergers and acquisitions - one of the key catalysts for the surge in global share prices in recent years - will be harder to come by.