Investors swarm T-bills, credit tightens

September 29, 2008 1:36:48 PM PDT
The credit markets were thrown into further turmoil Monday after the House rejected the government's proposed financial bailout plan, sending investors swarming again for the safety of Treasury bills. As the Dow Jones industrial average plunged nearly 780 points, the yield on the 3-month Treasury bill fell to 0.46 percent from 0.87 percent late Friday, after dropping as low as 0.32 percent. Low yields show that investors are prepared to get meager returns on an investment as long as it is secure.

John Spinello, bond strategist at Jefferies & Co., called the moves in both bonds and stocks "violent."

"We're dealing with moment-to-moment, dynamic action that's so hard to describe," he said.

Earlier Monday, LIBOR, or London Interbank Offered Rate, for 3-month dollar loans had risen to 3.88 percent from 3.76 percent on Friday, suggesting that banks have grown increasingly unwilling to lend to each other. LIBOR for 3-month euro loans, meanwhile, soared to 5.22 percent, the highest rate ever.

And other lending rates increased from already lofty levels - including those on short-term company debt known as commercial paper, and those on overnight loans in the repo markets, where banks and other institutions do temporary borrowing.

To be sure, some of the problems in the credit markets, where corporate borrowers go to find loans, have been feeding on themselves. Much of the recent tightness in the markets has been caused by investors waiting for the outcome of the rescue package, which proposed to allow the Treasury to spend up to $700 billion buying banks' souring mortgage-backed debt.

"I think everybody focusing on Washington froze the credit markets," said Howard Simons, strategist with Bianco Research in Chicago. Knowing the government under the plan would buy mortgage-backed securities but not knowing how they would go about it, or much they would pay for them, kept other potential buyers in wait-and-see mode, he said.

But while it is possible that the fears are overblown, few are willing to make contrarian bets - particularly given how many times academics, government officials and bank executives called a bottom to the global financial systems' woes, only to have their predictions blow up in their faces.

The global financial landscape continues to change, keeping large and small investors alike on edge.

"Right now, banks don't trust one another," said Axel Merk, portfolio manager at Merk Funds. Even if the rescue package does get approved eventually, it "is a tool that the Treasury can use, but it's not the solution to all the problems out there."

Citigroup Inc. acquired Wachovia Corp. Monday in a deal brokered by the government. That development follows Washington Mutual Inc. becoming the largest bank to fail in U.S. history; Lehman Brothers Holdings Inc. becoming the largest company to file for bankruptcy; the government takeover of insurer American International Group Inc. and mortgage financiers Fannie Mae and Freddie Mac; and Bank of America Corp's shotgun buyout of Merrill Lynch & Co.

The mortgage crisis is also ripping through Europe, where there are many large banks whose failures could rock the global financial system. The British government is nationalizing the troubled mortgage lender Bradford & Bingley, while Belgium, the Netherlands and waiting to make sure the market did not have further to fall.

"As long as the Fed and Treasury are trying to keep things in a holding pattern," Crandall said, "potential buyers feel no sense of urgency."


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