Credit markets still taut; interbank loan rates up
Friday, 26 September 2008

AP, NEW YORK -- Washington appeared closer to a bank bailout plan agreement, but that provided little solace Thursday to the credit markets, which remained stressed and kept Treasury bill demand high.

The yield on the 3-month Treasury bill was at 0.47 percent Thursday, down slightly from 0.49 percent late Wednesday, suggesting no relief on the part of investors, who have been shoveling their money into government debt on the worry that other traditionally safe assets -- such as money market mutual funds -- are no longer secure.
Goodyear Tire & Rubber Co., for one, had to draw $600 million from its credit lines because it was unable to access cash -- a major chunk of the which is invested in a money market fund called the Reserve Primary Fund that ''broke the buck'' last week. When a fund breaks the buck, it means its assets no longer cover each dollar invested in it.
The credit markets grew tight last summer when mortgage defaults started spiking. The markets truly tightened last week, however, in the aftermath of the bankruptcy of Lehman Brothers Holdings Inc. and the government takeover of insurer American International Group Inc.
Individual investors and companies alike are tense as they wait for Washington to come to an agreement about Treasury Secretary Henry Paulson's plan to assume $700 billion in risky debt from U.S. banks. On Wednesday, a major obstacle was cleared: Paulson agreed to lawmakers' demands that CEO pay would be capped if the deal goes through.
Still, on Thursday, the London Interbank Offered Rate, a bank-to-bank lending rate known as LIBOR, for 1-month dollar loans jumped to 3.71 percent from 3.43 percent late Wednesday, while the 3-month dollar LIBOR rate soared to 3.77 percent from 3.21 percent.
Indeed, LIBOR rates were higher earlier this year, but so were T-bill rates -- and it's the difference between these two rates that matters when it comes to gauging banks' willingness to lend. This is because LIBOR rates measure how risky banks believe it is to lend to other banks, while T-bills are considered virtually risk-free.
Longer-term Treasury issues were mixed, as some investors took advantage of the stock market's rally Thursday; the Dow Jones industrial average rose about 200 points by midmorning trading.
The 2-year note fell 29/32 to 99 27/32 and yielded 2.08 percent, up from 1.96 percent late Wednesday.
The benchmark 10-year Treasury note slipped 6/32 to 101 10/32, and its yield was at 3.84 percent, up from 3.81 percent. And the 30-year Treasury bond rose 2/32 to 101 16/32, and its yield dipped to 4.41 percent from 4.42 percent.
Some investors are worried that the Treasury's bailout plan could boost inflation. The fixed returns from bonds with long durations lose value over time if inflation rises.

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