Treasurys sink on stocks' rally

ROAD TO RESCUE

• Home prices up for 1st time in 3 years
• New home sales: 'Really good news'
• Wall Street: Here comes the hard part
• 7 regional banks fail
• Banker: "TARP helped avert a global calamity"

Quick Vote

What do you think of Geithner's plan to enlist private firms in the bank bailout?

• It's good - we need their money
• It's bad - it won't work

or View results

Click chart to view latest bond prices

Click chart to view latest bond prices

NEW YORK (CNNMoney.com) -- Government debt prices fell Monday as stock prices soared after the Treasury Department unveiled its plan to partner with private investors to buy up banks' troubled assets.

Under the new "Public-Private Investment Program," taxpayer funds will be used to seed partnerships with private investors that will buy up toxic assets backed by mortgages and other loans.

The program aims to buy at least $500 billion of existing assets and loans, such as subprime mortgages that are now in danger of default. Over time, it could potentially expand to $1 trillion.

The goal is to cleanse the balance sheets of many of the nation's largest banks, which continue to suffer billions of dollars in losses, and to get credit flowing again. The government will oversee auctions of the assets, hoping to effectively create a market for these assets.

The toxic asset problem has been intimately connected with the credit market for over a year. The troubled holdings continue to plague banks - as the value of the underlying loans backed by securities decline, the financial institutions holding those securities have to write down their value, resulting in steep losses for the banks.

Losses have mounted for the nation's financial sector, and banks have been unable to unload the troubled assets, because the assets continue to lose value. As a result of the wide-scale losses, banks have been less willing to issue loans, resulting in a massive credit crunch.

Stocks soared, with the major indexes all up more than 4%, as investors cheered the Treasury's new plan. That sent investors fleeing low-yield Treasurys for riskier but higher-yielding stocks.

"When you look at the program that's been rolled out, and the additional detail, that's helpful," said Steve Van Order, chief fixed income strategist at Calvert Funds. And with stocks rallying, "there's some unwinding of the flight to quality."

Bonds also fell ahead of yet another big test for the Treasury market this week. The Treasury will auction off a record $98 billion on 2-, 5- and 7-year bonds, on Tuesday, Wednesday and Thursday.

This year's massive auctions have thus far been met with large support by domestic and foreign investors, but the market shivered earlier in the month when Chinese Premier Wen Jiabao said that he had "some worries" about the safety of U.S. debt.

Still, the bond market's losses were pared as Vice Governor of the People's Bank of China Hu Xiaolian said Monday that China would continue to buy U.S. Treasurys for the time being - as long as they viewed their credit risk as low.

The market also maintained a level of stability on the Federal Reserve's recently announced plan to buy up $300 billion of government bonds in the next six months. The Fed program and China's short-term reassurance eased some anxiety that the huge influx of bond supply coming to the market may not be met with equal demand, leading to a potentially significant drop in bond prices.

The Treasury's auctions are part of the government's plan to issue between $2.7 trillion and $4.2 trillion of debt over the next two years to finance its economic and financial rescue plans. The government is set to pay $787 billion for stimulus, $700 billion for the bank bailout and trillions more in various liquidity programs.

Bond prices: The benchmark 10-year note traded down 7/32 to 100 25/32 and its yield rose to 2.66% from 2.65% late Friday. Bonds and yields move in opposite directions.

The 30-year bond slipped 21/32 to 96 15/32 with a yield of 3.7%, up from 3.66%.

The 2-year note fell 1/32 to 99 31/32, and yielded 0.89%, up from 0.88%.

The 3-month yield fell to 0.21%.

Lending rates: The 3-month Libor rate was unchanged at 1.22%, according to data on Bloomberg.com. The overnight Libor rate edged higher to 0.29% from 0.28%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

Two credit market gauges reflected relatively little change in liquidity. The "TED" spread shrank to 1 percentage point from 1.02 percentage points Friday. The narrower the TED spread, the more willing investors are to take risks.

The Libor-OIS spread edged up to 1 percentage point from 0.99 percentage point on Friday. A narrower spread indicates that more cash is available for lending.