Bonds rise despite bailout momentum
Weak economic outlook leads investors to buy up Treasurys, even as another stimulus and auto industry bailout appear likely.
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NEW YORK (CNNMoney.com) -- Demand for U.S. Treasurys remained high Wednesday, even as a bailout of the auto industry and a second stimulus package gained government support.
The benchmark 10-year note rose 26/32 to 102-25/32, and its yield fell to 3.65% from 3.76% late Monday. The U.S. Treasury market was closed Tuesday in observance of the Veterans Day Holiday. Bond prices and yields move in opposite directions.
The 2-year note rose 7/32 to 100-21/32, and its yield fell to 1.16% from 1.28%. Wednesday marked the lowest level for the 2-year yield since June 24, 2003.
The benchmark yield curve, the difference between the 2-year and the 10-year yield, rose to 2.49 percentage points Wednesday. The yield curve is a key measure of investor sentiment, with a higher curve indicating a weaker economic environment.
The 30-year bond rose 21/32 to 105-16/32, and its yield fell to 4.17% from 4.21%.
The yield on the 3-month bill fell to 0.15% from 0.25%, the lowest the yield has been in nearly two months. The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence, with a lower yield indicating less optimism. Investors and money-market funds shuffle money into and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace.
General Motors Corp. (GM, Fortune 500) has said it is in desperate need for cash, and its stock price fell Tuesday to a 65-year low. With rivals Ford Motor Co. (F, Fortune 500) and Chrysler also suffering from dismal sales and hard-to-find credit, House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., all threw their support behind a federal bailout of the American auto industry.
Democrats and some Republicans have also signaled support for a second economic stimulus package, as the economy has likely dipped into a recession. In addition to tax rebates, the stimulus could include an extension of jobless benefits, an increase in food stamps and aid to states and municipalities for infrastructure projects.
With the government expected to take up to a $1 trillion budget hit due to its various financial stability programs, the Treasury has previously said it expects to sell nearly $920 billion in bonds to fund its initiatives. More bailouts and stimulus packages would only add to the government's borrowing needs.
Such a large amount of incoming debt would typically rattle the bond market, as supply would outweigh demand. But in the current economic environment, investors have no appetite for risk. Demand for Treasurys continues to rise, as other investments like stocks and commodities remain volatile.
The yield on the 2-year note has been falling faster than the 10-year yield in recent months, as investors worry about making long-term investments in an uncertain economic climate. Furthermore, the market has also been anticipating that more rate cuts will come, and the 2-year note is most susceptible to short-term monetary policy actions.
Lending rates Wednesday indicated cheaper borrowing costs in a crunched lending market. The 3-month Libor rate fell to 2.13% from 2.18%, according to Dow Jones, the lowest level for the rate since Oct. 27, 2004. The overnight Libor rate rose for the second-straight day to 0.38% from 0.35%, according to Bloomberg.com.
Libor, the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend dollars in the U.K. It is a key barometer of liquidity in the credit market, because more than $350 trillion in assets are tied to Libor.
During the height of the credit crisis last month, 3-month Libor was at 4.82%, and the overnight rate was at an all-time high of 6.88%.
The government has initiated a multitude of programs aimed at easing the stranglehold on credit and encouraging private lending, many of which have helped drive down lending rates. But companies have continued to struggle in acquiring private financing, even as rates have fallen. As a result, they have relied on the government's initiatives to provide them with the funding they need to stay afloat.
Market gauges: Two key gauges of risk sentiment indicated that investors are still nervous about credit conditions.
The Libor-OIS spread rose to 1.71 percentage points from 1.69 points on Tuesday. The spread measures the difference between actual borrowing costs and the expected official borrowing rate from the Fed. It is used as a gauge to determine how much cash is available for lending between banks. The bigger the spread, the less cash is available for lending.
Former Fed chairman Alan Greenspan has said that the Libor-OIS spread will serve as a good gauge for when credit has returned to normal. Though the indicator has fallen from a high of 3.66 points set last month, it is still far above the 0.11 percentage point seen prior to Sept. 15.
Another indicator, the "TED spread," rose to 1.99 percentage points from 1.75 points.
The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the less willing investors are to take risks. 
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