Date: 10/01/08

Credit Markets Tight As Possible Senate Vote Looms

By MADLEN READ
AP Business Writer

NEW YORK (AP) The credit markets remained choked Wednesday ahead of a possible Senate vote on the bank rescue plan, sending key lending rates and demand for Treasurys higher.

Two House leaders expressed optimism that the $700 billion bill to take risky mortgage-backed assets off banks' books would pass, after a provision that would boost insurance for people's deposits.

However, investors were skeptical. Not only was confidence high in the days leading up to Monday's vote by the House — which resulted in a rejection of the plan — but many market participants are unsure how effective the plan will be if it does pass.

In certain respects, the credit climate was slightly improved from earlier this week, when fund managers were trying to make their portfolios appear strong before presenting them to clients.

Now that it's the beginning of a new quarter, fund managers appeared a bit more willing to take on risk.

Rates on commercial paper — short-term debt issued by corporations — eased Wednesday compared with Tuesday.

And the London Interbank Offered Rate, or LIBOR, on overnight dollar loans dropped to 3.78 percent on Wednesday from Tuesday's record 6.88 percent. LIBOR measures how much banks are charging one another to borrow; many consumer lending rates, including about half of all adjustable-rate mortgages, are tied to LIBOR.

But overnight LIBOR remains well above the target Fed funds rate of 2 percent, showing that banks are still tending to hoard their cash than lend it.

Other important indicators also showed that fears were still running high.

LIBOR on 3-month dollar loans rose again Wednesday to 4.15 percent from 4.05 percent late Tuesday, while the 3-month Treasury bill yield dipped back to 0.62 percent Wednesday from 0.88 percent late Tuesday. Low Treasury yields indicate strong demand, and that investors are willing to make meager returns on an investment as long as it is safe.

The difference between the 3-month LIBOR and the 3-month T-bill yield, known as the "TED spread," has been hovering at around 3.5 percentage points — the highest level in more than 25 years.

Other longer-term Treasurys saw more buyers, too, as the Dow Jones industrial average fell more than 200 points in morning trading.

The 2-year Treasury note rose 12/32 to 100 14/32, and yielded 1.78 percent, down from 1.97 percent.

The 10-year note rose 1 7/32 to 102 21/32, and yielded 3.66 percent, down from 3.83 percent.

The 30-year bond rose 2 26/32 to 105 30/32, and yielded 4.15 percent, down from 4.31 percent.

Investors, particularly money market funds, have been rushing for the safety of Treasurys over the past several weeks in the wake of the collapse of Lehman Brothers Holdings Inc. and the takeover of the world's largest insurer, American International Group Inc.

A money market funds called the Primary Reserve Fund "broke the buck" two weeks ago due to its exposure to Lehman; when a fund breaks the buck, it means it does not have enough assets to cover every dollar invested in it.

Copyright 2008 The Associated Press.