10-year T-note briefly hits record low

Investors stampeded into U.S. government bonds Thursday, driving the interest rate on the 10-year Treasury note as low as a record 1.5309 percent before closing at 1.578 percent.

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.

Yields on bonds move in the opposite direction from prices; when prices rise, as they did Thursday, yields sink.

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 before 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 yesterday unnerved investors further.

"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 Royal Bank of Scotland. "Today's economic numbers show that there are big cracks in the U.S. armor."

One bright spot for the average American is that the drop in Treasurys yields means even cheaper mortgage rates.