Treasury prices tread water
As the fate of the U.S. auto industry bailout hangs in limbo, government debt prices are mostly unchanged. Lending rates between banks continue to dip.
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| Click on the chart to see other government debt prices and yeilds. |
NEW YORK (CNNMoney.com) -- Government debt prices were little changed Thursday as the fate of the bailout for the U.S. auto industry remained in limbo.
Meanwhile, bank-to-bank lending rates extended their downward trend and the market for business debt continued to expand - both signs of improvement for the credit markets.
Treasury prices have been at record highs and yields at record lows as investors flee stock market volatility in favor of having the government keep their dollars safe.
Since the fall of Lehman Brothers in mid-September, demand for Treasurys has been very high - driving prices up. Short-term Treasury bills - like the 3-month bill - have been yielding basically nothing. Bond prices and yields move in opposite directions.
But as Congress decides whether or not to bail out Detroit, bond investors hesitate.
The House passed a stopgap $14 billion bailout Wednesday evening, but with significant Republican opposition there were doubts as to whether the bill would make its way through Senate.
"We don't quite know how it is all going to shake out yet," said Steve Van Order, fixed-income strategist at Calvert Funds. After a slew of other unprecedented bailouts and failures, Van Order said that investors may tread lightly as they watch for any "unintended consequences" of a deal.
The ramifications of a bankruptcy by one of the Big Three automakers could be disastrous for the U.S. economy, affecting millions of jobs.
Unemployment rates are already elevated - employers slashed 533,000 jobs in November - and the potential of further job loses associated with the turmoil in the auto industry had investors skittish.
The auto industry bill is intended to keep General Motors (GM, Fortune 500) and Chrysler LLC out of bankruptcy through at least March in order to give the new Congress and the Obama administration an opportunity to craft a more long-term approach.
Debt prices: The benchmark 10-year Treasury rose 20/32 to 109 27/32 and its yield dipped to 2.62% from 2.69% late Wednesday. Two weeks ago, the 10-year yield fell below 3% for the first time since the note was first issued in 1962, and on Dec. 4, the yield on the benchmark Treasury closed at a record low of 2.55%.
The 30-year bond rose 7/32 to 127 14/32 and its yield fell to 3.08% from 3.09%. The record low yield for the 30-year was 3.06%, where it closed on Dec. 4.
The 2-year note rose 4/32 to 100 29/32 and its yield fell to 0.80%. On Dec. 4, the yield on the 2-year note hit a record low of 0.82%.
The yield on the 3-month note was 0.02% Thursday, and has been hovering around 0% for days. The short-term note is a closely watched gauge of investor confidence.
Investors and money-market funds shuffle funds in and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace. A higher yield indicates that investors are slightly more optimistic.
Yields near the zero mark on short-term bills suggest that institutions want to keep funds in a safe haven but one that can easily be liquidated, said William Larkin, portfolio manager at Cabot Money Management.
With the end of the year approaching, one analyst said that he expects demand for Treasurys to remain strong. That's because investors, portfolio managers, and money market fund managers "want to have Treasurys on their books between now and year end," said Andrew Brenner, senior vice president of MF Global.
Government debt prices have remained elevated even in the face of a massive infusion of supply coming to the market. The Treasury auctioned $16 billion of 9-year 11-month bills Thursday. A constant flood of supply should work to lower government bond prices, but an equally constant stream of negative economic news has been keeping investors flocking to the safety of Treasurys.
"The really bad recession-with-deflation bandwagon is gaining more members," said Van Order. "We are seeing this bad data - everybody is back to watching the weekly jobless claims numbers," he added.
On Thursday, the Labor Department reported that initial filings for unemployment benefits shot to a 26-year high last week. The number of Americans filing new unemployment insurance surged to 573,000 for the week ended Dec. 6, far surpassing the consensus estimate of 525,000, according to Briefing.com.
The continuous barrage of negative economic news continues to push investors toward the safety of Treasurys, especially in concert with a hint from Fed Chairman Ben Bernanke last week that the government could step in and become a buyer of its own debt. "But the risk is that if we recover faster than people are expecting, then Treasury yields are way too low," said Van Order.
Lending rates: The overnight Libor rate paused at its record low of 0.12% Thursday, according to data available from Bloomberg.com. The bank-to-bank lending rate has been at record lows as central banks around the world have pushed their key lending rates down in an effort to stem the recession.
Libor, the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend money in London, and is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor.
The 3-month Libor rate fell to 2.0% from 2.1% Wednesday.
Two market gauges showed growing optimism. The "TED spread" narrowed to 1.98 percentage points from 2.08 percentage points late Wednesday. 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 more unwilling investors are to take risks.
Another indicator, the Libor-OIS spread, narrowed to 1.72 percentage points from 1.84 percentage points. The Libor-OIS spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending.
Commercial paper: Bank-to-bank lending rates have come down from the high levels reached during the credit crisis, largely helped by a slew of government programs aimed at pumping more cash into the system.
For example, the Federal Reserve's Commercial Paper Funding Facility. started on late October, allows companies to sell highly rated 3-month debt to the government in exchange for ultra-low interest rates.
Commercial paper is short-term debt that big businesses and financial institutions issue to pay for day-to-day business operations like payroll and utilities. The debt was traditionally purchased by institutional investors as a safe and secure asset, but since Lehman Brothers' demise, investors have been more hesitant to purchase the paper, leaving some companies unable to get the cash they need to meet their daily responsibilities.
A Fed report released Thursday showed that business lending expanded for the seventh week in a row. The amount of so-called commercial paper that was sold in the seven days ended Dec. 10 rose by $48.6 billion, or nearly 3%, to a seasonally adjusted $1.7 trillion, according to the report.
Van Order said that the Fed's commercial paper facility has been working. "Some people were only able to roll their papers overnight - and the Fed offered a 90-day option, so yes it has been successful," he said. 
