Bonds in tight range

NEW YORK (CNNMoney.com) -- Government debt prices moved in a narrow range Tuesday after Federal Reserve Chairman Ben Bernanke said that there may have to be more bailouts of faltering financial institutions in the coming months.

Bernanke's comments came after President Bush - on behalf of President-elect Barack Obama - formally asked Congress for the remaining $350 billion of bailout cash late Monday.

With the U.S. budget deficit in 2009 expected to hit a record $1.2 trillion, the government has already been selling a high volume of government debt. But a combination of Bernanke's comments and Obama's stimulus plan, which is heavy on spending, will do little to slow the torrent of government debt headed to market.

"There is still just enough general concern in the market that people aren't really selling their Treasurys with great willingness so there is not a lot of selling pressure," said Kim Rupert, fixed-income analyst at Action Economics. Debt prices hovered in a tight range for most of the session Tuesday.

In order to see bond prices really decline, Rupert said that the market would have to see increased confidence. She said there would have to be "some confirmation from the data" that the economy was headed out of the recession. Until then, investors would remain mostly cautious.

Bonds may see some support as the market moves through the latest quarterly earnings season, which was kicked off by aluminum producer Alcoa reporting a worse-than-expected loss. Investors typically seek the safety of government-backed debt when there is dour news.

"Pretty poor earnings news from Alcoa has added to expectations that it is going to be a pretty dismal earnings season," said Rupert.

Meanwhile, bank-to-bank lending rates continued to decline, with the 3-month Libor rate tumbling to a more than 5-1/2-year low.

Bernanke says more bailouts: In a speech in London Tuesday, Bernanke said that Obama's stimulus package could help support the economy, but he also warned that it won't be enough.

But Rupert said that Bernanke's comments "did not really break any new ground." The Treasury market had been hoping for any details about whether the Fed would step in and purchase its own debt as it had previously hinted.

"The market is interested to know when and if they are buying Treasury, and he didn't really add anything to that," said Rupert.

On Wednesday, the government is set to auction $30 billion of cash management bills. Already this week, the Treasury has auctioned $22 billion worth of 52-week bills, $24 billion worth of 4-week bills, $26 billion worth of 13-week bills and $27 billion worth of 26-week debt.

Obama pitched his stimulus plan to Congress and, on Monday, he made an urgent plea to Congress to make the second half of the $700 billion Troubled Asset Relief Program (TARP) funds available.

Debt prices: The benchmark 10-year note rose 2/32 to 112-23/32, and its yield slid to 2.30%. Bond prices and yields move in opposite directions.

The 30-year bond fell 10/32 to 128-24/32, and its yield rose to 3.02%

The 2-year note also edged lower by less than 1/32 to 100-9/32, and its yield rose to 0.75%

The yield on the 3-month Treasury bill rose to 0.12% from 0.07% late Monday. The short-term bill is a gauge of investor confidence because mutual funds and other investors shuffle funds into and out of the note as they assess risk in other parts of the marketplace.

Toward the end of 2008, investors were buying 3-month Treasurys with a yield at or just above 0%, meaning they were not making any profit.

Lending rates: The 3-month Libor marched lower to 1.09%, according to the British Banker's Association. The last time the 3-month lending rate was at such a low level was June 25, 2003, when the rate was 1%, according to the BBA.

Meanwhile, the overnight Libor rate held at its record low of 0.10%, according to the BBA.

Libor - the London Interbank Offered Rate - is a daily average of rates 16 different banks charge each other to lend money in London, and it is used to calculate adjustable-rate mortgages. More than $350 million in assets are tied to Libor.

Two credit market gauges showed increasing confidence in the marketplace.

The "TED spread" narrowed to 0.97 percentage point from 1.09 percentage points Monday. The higher the spread, the less willing investors are to take risks. The rate widened to historic levels as the credit market froze in the fall. As central banks around the world have eased lending rates and worked to increase liquidity in the marketplace, the spread has come back down.

Another indicator, the Libor-OIS spread also narrowed to 0.92 percentage point from 0.99 percentage point Monday. The Libor-OIS spread is a measure of how much cash is available for lending between banks, used for determining lending rates. The bigger the spread, the less cash is available for lending.

On Jan. 20, Barack Obama will be inaugurated as the 44th president of the United States. What should he do to help common Americans in these trying economic times? E-mail us at realstories@cnnmoney.com, and your thoughts could be part of an upcoming story.