Bonds dip as auto industry gets rescue
Government debt prices pull back from record highs and yields lift off lows as the Bush administration grants the auto industry $13.4 billion. Lending rates continue to decline.
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| Click on the chart to see other government debt prices and yields. |
NEW YORK (CNNMoney.com) -- Government debt prices were just off record highs Friday, with yields still hovering near record lows, as the Bush administration finally granted the auto industry the bailout it was waiting for.
Treasurys recovered from earlier losses as cautious investors returned to the bunkers, looking for the safety of government-backed debt.
Stocks ended mixed Friday, after a short-lived rally in the morning, as investors mulled the Bush Administration's plan to bail out the auto industry.
The announcement comes after weeks of uncertainty over the government's response to the troubles facing the nation's auto industry. But the outlook for Detroit remains grim.
"Even when the market reacts to the snippet of good news, the enormity of bad news that is out there tends to overwhelm the short-term or temporary good news," said Kenneth Naehu, managing director and head of fixed income at Bel Air Investment Advisors, which manages assets of more than $5 billion.
Auto bailout: President Bush announced a rescue package for General Motors (GM, Fortune 500) and Chrysler LLC Friday morning that made $13.4 billion in federal loans available to the struggling U.S. auto makers almost immediately. Another $4 billion could be forthcoming later.
The two automakers have been pleading for the government to grant them a piece of the bailout pie, but the Senate overturned their initial requests and the fate of the rescue hung in limbo for weeks.
The U.S. has been in a recession since the end of December 2007, and with unemployment levels elevated and job losses continuing to mount, the economy would have had a very hard time absorbing the millions of job losses associated with the failure of one of the Detroit Big Three.
One analyst cautioned that the bailout plan was not a permanent fix for the troubled auto sector.
The loans will have to be repaid immediately if the firms do not show themselves to be viable by March 31. "The problems plaguing the auto sector have been present for a very long period of time," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson. "Three months is very little time."
Record demand: The demand for government bonds has been unprecedented in recent weeks as investors have sought a safe haven from volatility in other markets. Government debt is considered one of the safest investments available, because Uncle Sam is responsible to back the investment.
Jittery investors have been willing to sock their money away with Uncle Sam without even expecting a return on their investments. The yield on the 3-month Treasury bill has been hovering around zero in recent sessions, and was at 0.02% Friday.
The 3-month Treasury note is a closely watched barometer of investor confidence because individuals and mutual funds shuffle funds into and out of the bill as they asses the risk of the rest of the marketplace.
Fed's moves: Investors were also still trying to digest the Fed's moves earlier in the week. Longer term government debt prices rallied after the Federal Reserve's announcement Tuesday that it was considering a plan which would involve purchasing its own long-term debt.
In the same announcement, the U.S. central bank slashed its key federal funds rate to a target range of 0% to 0.25%. The government has lowered the key lending rate in an effort to spur lending and help the economy recover. The government is now forced to consider other options.
With the Federal Reserve pledging to pull out all the stops in order to get the economy back on track, investors are motivated to move their funds to other, slightly riskier places.
"We have seen a much improved sentiment in the corporate bond market and high yield market," said William Larkin, portfolio manager at Cabot Money Management. Those are the same markets that dried up at the height of the credit crisis.
As yields on government debt hit record lows and new stimulus plans threaten to require tremendous supply of Treasurys to flood the market, investors are mulling whether it is time to move their assets out of Treasurys and demand higher returns.
Government debt prices: Longer-term debt yields also fell to record lows this week as prices shot up.
Therefore, some of the pullback in Treasury prices Friday was investors looking to cash out ahead of the holiday week. "Given the large upward price move that we have seen this week, there is a lot of profit taking, as well," said Hurley.
The benchmark 10-year note yielded 2.13% Friday, and its price dipped 13/32 to 114-14/32. Thursday, the benchmark note closed at an all time low of 2.07%. Bond prices and yields move in opposite directions.
The 30-year long bond was yielding 2.56% as its price sunk 26/32 to 140-1/32. The 30-year yield fell to 2.52% Thursday, which was its lowest level since the bond was introduced in 1977.
The 2-year note yielded 0.75%, and its price fell 4/32 to 100-31/32. Thursday, the 2-year note ended the session at 0.68%. The yield on the 2-year note closed at 0.65% Tuesday.
Lending rates: Meanwhile, lending rates have been on a downward slide. In the aftermath of the collapse of Lehman Brothers, banks stopped lending to each other, preferring instead to hoard their cash. When banks stopped lending to each other, that choked off available funding to businesses and consumers.
But in response to aggressive moves by the central banks of the world to increase liquidity in the system, lending rates have come down from record highs.
The 3-month Libor rate was 1.50%, according to data available from Bloomberg.com, down from 1.52% Thursday. The 3-month lending rate was as high as 4.75% in the middle of October of this year.
The overnight bank-to-bank lending rate held at 0.11%, even with Thursday. The overnight lending rate was as high as 6.88% at the end of Sept.
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.
Two credit market gauges showed mixed signs of confidence in the credit market.
The "TED spread" narrowed to 1.48 percentage points from 1.51 percentage points late Thursday. 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 1.29 percentage points, even with Thursday. The Overnight Index Swap rate was at 0.21%.
OIS rates are set against the effective Fed funds rate, as opposed to the central bank's target rate or range. 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. 
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