Long-term bond prices climb
Investors continue to favor the security of government debt despite traction on government stimulus plan.
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| Click on the chart to see other government bond prices and yields. |
NEW YORK (CNNMoney.com) -- Prices for long-term Treasury bonds rose Wednesday as investors remained wary about the prospects for an economic recovery despite a breakthrough in the debate over the government's $789 billion stimulus plan.
Lawmakers in the House and Senate hammered out an agreement on the stimulus plan, which still needs to be approved by President Obama before it becomes law.
According to congressional sources, the plan contains: tax breaks for workers of $800 per family and $400 per individual; $44 billion in aid to states; $6 billion to $9 billion for modernizing and repairing schools and an unspecified amount for health care subsidies.
While the plan is designed to jolt the U.S. economy out of the recession it has been mired in for more than a year, investors remain concerned about the immediate outlook for the economy.
"The cruel reality of current events is going to push an economic recovery farther out than previously anticipated," said Bill Larkin, a fixed-income portfolio manager at Cabot Money Management in Boston.
Economists had been forecasting a recovery for the second half of 2009, but as economic conditions continue to deteriorate, the crisis may not begin to ebb until the beginning of 2010, Larkin said.
"Things are likely to get worse before they get better," he said.
The stimulus news comes one day after Treasury Secretary Tim Geithner outlined the Obama administration's plan to restore confidence and liquidity to the battered financial sector on Tuesday. Stocks plummeted to 3-month lows Tuesday after Geithner delivered few details about the plan, although there was a slight rebound early Wednesday.
"People were expecting a little bit more behind it," said Craig Ziegler, managing director of Broadpoint Securities Group. The market was looking for "further details and clarification from what was brought up yesterday."
Geithner testified before a Senate panel Wednesday.
Putting together a stimulus package that both houses of Congress agree on "has been glacial and systematically is eroding market confidence," wrote Nick Kalivas, vice president of financial research at MF Global, in a research note about the outlook for fixed income assets.
As investors become increasingly frustrated with the government's delay in formulating a cohesive rescue strategy, demand for Treasurys should be supported, wrote Kalivas.
Investors focused on the severity of the economic crisis, fearing it could be a long, slow recovery. That discouragement pushed investors to the safety of Uncle Sam's debt.
Kalivas also mentioned that the bond market may have lost a few buyers because Federal Reserve Chairman Ben Bernanke did not provide any update on the government's potential plan to step into the market and purchase Treasurys. Bernanke appeared before the House Financial Services Committee Tuesday to answer lawmaker's questions about the reach of the Fed's power.
Quarterly refunding: Meanwhile, in order to fund the rescue plans, the government has had to sell a record volume of debt, keeping a downward pressure on bond prices.
On Wednesday, the government sold $21 billion of 10-year notes, the largest auction for that maturity on record, according to a Treasury department spokesperson. The sale attracted over $46 billion worth of bids, more than double the available debt.
The government plans will sell $14 billion worth of 30-year bonds Thursday. On Tuesday, $32 billion of 3-year notes was sold, with Ziegler saying demand was healthy, especially from foreign bidders.
Debt prices: The benchmark 10-year note rose 2/32 to 108 15/32 and its yield fell to 2.76%. Bond prices and yields move in opposite directions.
The 30-year bond jumped 1 2/32 to 11911/32 and its yield fell to 3.45%. The 2-year note edged down 2/32 to 99 29/32 and its yield was 0.92%.
The yield on the 3-month note was 0.31%, slightly lower than 0.33% the day prior. Demand for the shorter-term note has been seen as a gauge for investor confidence.
Lending rates: Bank-to-bank lending rates were mostly unchanged. The 3-month Libor rate ticked up to 1.23% Wednesday from 1.22%, according to data on Bloomberg.com. The overnight Libor rate, meanwhile, held steady at 0.30%.
Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London and is used to calculate adjustable-rate mortgages among other consumer loans. More than $350 billion in assets are tied to Libor.
Two credit market gauges showed decreased confidence. The "TED" spread widened to 0.93 percentage point from 0.90 percentage point the day before. The bigger the TED spread, the less willing investors are to take risks.
Another market indicator, the Libor-OIS spread, increased to 0.96 percentage point from 0.95 percentage point the day earlier. The wider the spread, the less cash is available for lending. 
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