Citi rescue: No relief for credit markets

NEW YORK (CNNMoney.com) -- Credit markets shrugged Friday in the aftermath of a Citigroup Inc. announcement that it would rescue seven troubled investment funds - a sign of just how shaky this key area of the financial markets remains.

Citigroup (C, Fortune 500) said late Thursday that it would take $49 billion of assets held by its structured investment vehicles, or SIVs, onto its balance sheet. The step was a bold one for Citi, whose long-term credit rating was downgraded by Moody's as a result.

The news provided little comfort to already troubled debt market, instead leaving open the debate as to whether the worst of the ongoing crisis has passed.

"It hasn't resolved anything," said Josh Stiles, senior bond strategist at IDEAglobal in New York. "It's really just turned up volume of the argument."

Bond markets appeared unfazed by the news as yields on highly-rated corporate and municipal debt climbed Friday. Bond prices and yields move in opposite directions.

Investors also moved out of safe-haven Treasurys sending the yield on the benchmark 10-year note to 4.24 percent, up from 4.17 percent a day earlier.

Credit default swaps, a key measure of risk, narrowed only modestly on the news, credit analysts said.

To be sure, pressure has eased in some parts of the debt market. As of the first week of December, the backlog of financing for corporate buyouts, for instance, has been reduced to about $200 billion from $300 billion right before Labor Day. That's an improvement but still a substantial amount of debt for the market to wade through.

Citi's decision also clouds the outlook for a debt rescue fund backed by Wall Street banks and the Treasury Department in the fall. Citi, J.P. Morgan Chase & Co. (JPM, Fortune 500) and Bank of America (BAC, Fortune 500) said in October they were setting up a fund, dubbed the "super SIV" on Wall Street, to buy assets from structured investment vehicles.

"If the direct originators are shouldering the liabilities on their own shoulders, it may be less needed," said David Hendler, a senior analyst at independent debt research firm CreditSights, said about the superfund.

Fears that a freeze in short-term credit markets would trigger a fire-sale of SIV assets led to the formation of the debt rescue fund in October. At the time, the banks said the fund could be launched by the end of the year.

But little progress appears to have been made with the superfund, which has been dogged by skepticism since it was introduced.

"Over time it turned out that there was hardly a need for the fund in the first place," said Andrea Cicione, a credit strategist at BNP Paribas in London. "Now it looks really unnecessary since the bulk of the outstanding SIVs have been brought onto the balance sheets of banks," he said.

Since the superfund was announced, many SIVs have found ways to sell their assets, dampening the need for the marketplace the banks set out to establish with the superfund. The amount of assets held by SIVs has fallen to about $320 billion, down from nearly $370 billion in July, according to Fitch Ratings.

The amount of assets held by SIVs managed by Citi fell to $49 billion from $80 billion in October, making it more manageable for the firm to bring them on to its balance sheet.

Citi said it still supports the superfund which it helped spearhead. But in the two months since the idea was first launched, the banks behind the fund haven't revealed how big the fund will be or what partners they've signed up. Citi, Bank of America and J.P. Morgan did not return calls seeking comments about their commitment to the fund.

Given the moves banks are now making on their own, the superfund may have lost its purpose.