BOND YIELDS DRIVE LONG-TERM MORTGAGE RATES TO HIGHER LEVELS

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BOND YIELDS DRIVE LONG-TERM MORTGAGE RATES TO HIGHER LEVELS

 

Short-Term Rates Rise As Well

 

McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 6.46 percent with an average 0.7 point for the week ending October 30, 2008, up from last week when it averaged 6.04 percent. Last year at this time, the 30-year FRM averaged 6.26 percent.

 

The 15-year FRM this week averaged 6.19 percent with an average 0.7 point, up from last week when it averaged 5.72 percent. A year ago at this time, the 15-year FRM averaged 5.91 percent.

 

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.36 percent this week, with an average 0.7 point, up from last week when it averaged 6.06 percent. A year ago, the 5-year ARM averaged 5.98 percent.

 

One-year Treasury-indexed ARMs averaged 5.38 percent this week with an average 0.6 point, up from last week when it averaged 5.23 percent. At this time last year, the 1-year ARM averaged 5.57 percent.

 

(Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.)

 

“Long-term mortgage rates followed long-term Treasury bond yields higher this week, pushing fixed-rate mortgages up to levels of two weeks ago,” said Frank Nothaft, Freddie Mac vice president and chief economist. “The Federal Reserve’s 0.50 percentage point cut in the discount rate and federal funds target rate on Wednesday was widely anticipated in the financial markets and is likely to keep short-term interest rates low; consequently, initial interest rates on ARMs, which tend to be set relative to other short-term rates, may remain near current levels.

 

“In other news, house-price declines in many markets have improved housing affordability and stimulated home sales. In September, sales of existing homes rose 5.5 percent while sales of new homes were up 2.7 percent, at a seasonally-adjusted annual rate.”

 

Source: freddiemac.com

 

Fed cuts key interest rate half-point to 1 percent

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Fed cuts key interest rate half-point to 1 percent

 

WASHINGTON (AP) — The Federal Reserve slashed a key interest rate by half a percentage point Wednesday, driving it to a level seen only once before in the last half-century, and the government finally began distributing funds from the billions in the financial rescue package.

 

Those efforts and others were part of a concerted drive by officials, just days before a national election, to demonstrate they are moving as quickly as possible to deal with the most serious financial crisis to hit the country since the 1930s.

 

“Policymakers have their foot to the accelerator and they are using every effort at their disposal to stop the slide in the economy and financial markets,” said Mark Zandi, chief economist with Moody’s Economy.com. “And it’s not a moment too soon given the serious damage that has already been done.”

 

Wall Street, which the previous day posted the second biggest point gain in history, was less impressed with Wednesday’s activity. The Dow Jones industrial average finished the day down 74 points, a drop analysts said partly reflected growing worries about whether the government’s actions will be sufficient to avert a deep and prolonged recession.

 

The Fed, as investors had hoped, announced a half-point cut in the federal funds rate, the interest that banks charge each other on overnight loans, driving it down to 1 percent, a low last seen in 2003-2004. That rate has not been lower since 1958 when Dwight Eisenhower was president.

 

Reducing the rate as low as zero cannot be ruled out, some analysts said, but they cautioned that reducing rates that far carried some risks, including that if the credit crisis suddenly worsened, the Fed would have used up its ammunition.

 

Analysts also noted that just lowering rates cannot serve as a panacea to overcome a credit crisis. While the goal is to encourage banks to begin lending again, financial institutions are skittish about extending new loans given the huge losses they have racked up in bad mortgages.

 

Meanwhile, the administration announced that the spigot had been opened on the $700 billion fund created by Congress Oct. 3 to rescue the U.S. financial system. Treasury issued a report showing checks had been disbursed for $125 billion in payments to nine major banks, including Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs and Morgan Stanley. The goal is to bolster their balance sheets so they will resume more normal lending.

 

And the administration was nearing an agreement on a plan to help around 3 million homeowners avoid foreclosure, according to sources who had been briefed on the matter. The program would be the most aggressive effort yet to limit damages from the severe housing slump.

 

Besides cutting interest rates, the Fed announced it was extending credit lines worth $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in an effort to bolster financial markets in those countries and relieve investors’ anxieties.

 

It brought to 14 the number of central banks that the Fed has entered into so-called swap arrangements for currency as a way to pump more liquidity into global credit markets, part of an effort that the Bank of England estimated has resulted in $5 trillion in support being put forward by governments worldwide.

 

The International Monetary Fund unveiled a new streamlined lending process to get support to countries caught up in the credit crisis, another effort by the 185-member institution to show it was prepared to perform its job as lender of last resort to countries facing difficulties. The IMF already has moved to help Iceland, Ukraine and Hungary with other nations quickly lining up for aid.

 

The Fed’s half-point interest rate cut marked the second rate reduction this month. The Fed slashed the rate by a half-point on Oct. 8 in a coordinated action with other foreign central banks. Economists predict foreign central banks will follow suit with another round of rate cuts over the next week.

 

In a brief statement explaining Wednesday’s action, the Fed said that the “intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit.”

 

The central bank said that “downside risks to growth remain” holding out the promise of further rate cuts if needed. The rate-cut decision was unanimous.

Federal Reserve Chairman Ben Bernanke and his colleagues pledged they would “monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.”

 

Many analysts said they believe the Fed will not stop at 1 percent if officials see the need to cut rates further. Some are forecasting another half-point move at the Fed’s last meeting of the year on Dec. 16.

 

But other economists said with rates already so low, the Fed may decide to hold at 1 percent, leaving some room for a further reduction next year should the country’s economic troubles intensify.

 

The Fed’s action was quickly followed by a reduction by commercial banks in their prime lending rate, the benchmark for millions of consumer and business loans, which was cut from 4.5 percent down to 4 percent, its lowest level in four years.

The central bank also announced that it was lowering its discount rate, the interest it charges to make direct loans to banks, by a half-point to 1.25 percent. This rate has become increasingly important as the central bank has dramatically increased direct loans to banks in an effort to break the grip of the credit crisis.

 

All the frenzied activity is occurring against a backdrop of an economy that has slowed noticeably. The government will release its first look at overall activity in the July-September quarter on Thursday. The data are expected to show a decline of 0.5 percent at an annual rate, the first of what many private economists believe will be the first of two or more quarterly declines, fulfilling the classic definition of a recession.

 

Source: AP.org

 

 

Fed programs help ease credit

 

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Government initiatives to reduce the stranglehold on lending help borrowing costs sink. Treasury’s rise on continued economic concerns.

 

NEW YORK (CNNMoney.com) — Lending rates continued to fall Friday, in a sign that the government’s numerous plans to ease the credit crisis are taking hold.

The 3-month Libor rate sank lower to 3.03% from 3.19% on Thursday, and the overnight Libor rate fell for the fifth-straight day to 0.41% from 0.73% on Tuesday, according to Dow Jones.

Libor, the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend money in the U.K.

Lending rates have been trending downward for the past several weeks. Just a month ago, 3-month Libor was over 4%, and the overnight rate was at an all-time high of 6.88%. Lower rates are a major boost for the strangled credit market, as more than $350 trillion in assets are tied to Libor.

“We’re going into a recession, but lower rates are telling us that the world’s not coming to an end just yet,” said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Council.

The federal government has instituted several programs costing trillions of dollars aimed at easing funding concerns for banks and encouraging lending between financial institutions. These include measures such as lowering interest rates, injecting capital into banks and providing insurance on all non-interest bearing accounts.

One such program, the Fed’s Commercial Paper Funding Facility, has provided critical short-term financing to businesses in desperate need of cash. The Fed said Thursday it has bought up $143.9 billion in commercial paper since the program began Monday.

The Fed also reported Thursday that commercial banks borrowed a record $111.9 billion a day, on average, from its emergency lending window over the past week. Banks borrowing from the so-called discount window are able to borrow from the government for an interest rate of just 1.25%.

Many of these programs, including cutting $250 billion in checks to banks, have only recently come online, and analysts say it will still take time for the new initiatives to reduce the lending stranglehold that continues to grip banks.

“The federal government is stomping on the gas, and eventually the car is going to move,” said McCormick. “We’re beginning to see some cracks in Libor, but we’re seeing a trickle, not a waterfall.”

As rates fell, two key indicators of risk sentiment showed that confidence in the market was improving.

The Libor-OIS spread fell to 2.42 percentage points from 2.49 points Thursday. The spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending.

Another indicator, the “TED spread,” fell to 2.69 percentage points from 2.82 points on Thursday. The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the less willing investors are to take risks.

Treasurys

U.S. Treasurys rose Friday as investors anticipated a slew of economic indicators to be released later in the day would show even more weakness in an economy likely already mired in a recession.

The benchmark 10-year note rose 29/32 to 101-5/32, and its yield fell to 3.86% from 3.97% late Thursday. Bond prices and yields move in opposite directions.

The 30-year bond gained 1-14/32 to 104-8/32, and its yield sank to 4.25%, from 4.33%.

The 2-year note was up 4/32 to 100, and its yield fell to 1.51% from 1.57% late Thursday.

The yield on the 3-month bill fell to 0.34% from 0.40% on Thursday as the price ticked higher.

The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence. Investors and money-market funds shuffle money into and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace. A lower yield indicates that investors are less optimistic.

Treasurys were much lower Thursday as stocks gained around the world on news of the Fed’s rate cut and an initial estimate of the country’s gross domestic product showed the economy shrank less than expected. 

Source: http://money.cnn.com/2008/10/31/markets/bondcenter/credit_market/index.htm

 

U.S. mortgage applications bounce from 8-year low

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NEW YORK, Oct 29 (Reuters) – Demand for U.S. mortgage applications climbed last week from a nearly eight-year low, while borrowing costs dipped, a trade group said on Wednesday.

 

The Mortgage Bankers Association’s seasonally adjusted mortgage applications index, which includes both purchase and refinance loans, increased 16.8 percent to 476.7 in the week ended Oct. 24, reversing the prior week’s 16.6 percent slump to the lowest reading since December 2000.

Requests for applications to buy homes as well as refinance mortgages increased last week after posting similar declines the previous week.

The trade group’s seasonally adjusted purchase index rose 8.5 percent to 303.1 after falling 10.9 percent the prior week, while its refinancing applications gauge jumped 28.5 percent to 1,489.4 following a 23.5 percent downturn.

Average 30-year mortgage rates dipped 0.02 percentage point last week to 6.26 percent. The rate has risen as high as 6.59 percent during the summer but was as low as 5.49 percent in January, according to the Mortgage Bankers Association.

The upturn in demand for applications comes amid mostly disheartening signs about the health of the U.S. economy and housing.

Home prices in August were nearly 22 percent below their peak in June 2006, according to a Standard & Poor’s/Case-Shiller Home Price Index reported on Tuesday.

The worsening global financial crisis intensified anxiety about employment and pessimism about the future, meantime, sent U.S. consumer confidence plummeting to a record low this month, the Conference Board said on Tuesday.

A deep recession would mean prolonged housing weakness, analysts contend. House prices are generally seen sliding another 10 percent.

Source: http://www.reuters.com/article/economicNews/idUSN2842553320081029

 

U.S. to begin doling out $125 billion to banks this week

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WASHINGTON —The government will begin doling out $125 billion to nine major banks this week as part of its effort to contain a growing financial crisis, a top Treasury official said today.

Assistant Treasury Secretary David Nason said the deals with the nine banks were signed Sunday night and the government will make the stock purchases this week. The deals are designed to bolster the banks’ balance sheets so they will begin more normal lending.

The action will mark the first deployment of resources from the government’s $700-billion financial rescue package passed by Congress on Oct. 3.

The bailout package has undergone a major change in emphasis since it was passed by Congress. Treasury Secretary Henry Paulson decided to use $250 billion of the $700 billion to make direct purchases of bank stock, partially nationalizing the country’s banking system, as a way to get money into the financial system more quickly.

As the rescue program wended its way through Congress, the administration emphasized that the money would be used to purchase bad assets of banks. That effort has yet to get started, though the administration expects to use $100 billion to purchase bad assets in coming months.

The deployment of the first $125 billion to the major banks had been delayed while the government and the banks worked out the details for the purchases.

Nason, a key architect of the rescue plan, said in an interview today on CNBC that those agreements had been signed late Sunday night.

Treasury is also starting to give approval to major regional banks with the goal of getting another $125 billion in stock purchases made by the end of this year.

One of those banks, KeyCorp, said today it would issue stock for a $2.5-billion infusion of capital from the government.

Another major bank, PNC Financial Services Group, announced on Friday it was acquiring National City Corp. It was the first instance of a bank using resources it has been told it will receive from the government’s stock purchase program to support an acquisition of another bank. PNC said it is in line to get $7.7 billion in cash from the government by selling stock and warrants to the government under the rescue program.

Treasury has given the go-ahead for stronger banks to use the money it receives in the rescue program to acquire weaker banks, prompting critics to say the government should not be financing the consolidation of the banking system — in effect helping to choose winners and losers.

Nason, asked about this issue today, said the administration’s major aim is to stabilize the financial system and that stronger institutions will be in a better position to make loans and support the overall economy.

Nason also confirmed the Treasury Department is reviewing a number of requests from a range of U.S. industries for help from the bailout program. Representatives of insurance companies, auto companies and foreign-controlled banks have all petitioned for help from the $700-billion fund.

Nason did not indicate when decisions on those requests might be made. He said one of the issues that Treasury had to consider was that in helping banks, which are federally regulated, the Treasury could tap into the knowledge of federal regulators in making decisions on how much money to supply and to which institutions. That type of information would not be available for non-federally regulated institutions, Nason said.

 Source: http://www.freep.com/article/20081027/BUSINESS07/81027037/1020/BUSINESS

 

Lee County ranks second in foreclosures in Florida; September numbers still show drop

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Lee County ranks second in foreclosures in Florida; September numbers still show drop

 

The rate of foreclosures in Lee County slowed during the month of September compared to previous months, but still greatly outpaces state and national rates.According to a report released Wednesday from Realty Trac, a California-based company that tracks foreclosed homes, one in every 71 homes received a foreclosure filing in September, a decrease from the August rate of one in 66 and the July rate of one in 64.

The 4,764 homes that received a foreclosure filing — a default notice, auction sale notice or bank repossession — may be less than previous months, but the county foreclosure rate is still more than double the state average of one in every 178 homes, and more than six times the national average of one in every 475 homes.

Gloria Tate of Raso Realty said the numbers show an initial turnaround in the housing crisis, but cautioned that it would take some time before the market returns to normal.

“It’s the beginning of the healing of the market,” said Tate, a former Cape Coral council member and a registered agent for Realty Trac.

“It’s definitely going to take time. Once the market stabilizes, you’ll see prices start to go up,” Tate added.

Federal and state intervention may be helping to stem the tide of foreclosures, the Realty Trac report states. Nationwide, foreclosures are down 12 percent from August.

“Much of the 12 percent decrease in September can be attributed to changes in state laws that have at least temporarily slowed down the pace at which lenders are moving forward with foreclosures,” said James Saccacio, chief executive officer of Realty Trac.

The report cites laws in California and North Carolina that require at least a month notice before filing a notice of default.

Florida has not passed such a law and saw a 9 percent increase in foreclosures from August, making it the state with the second-highest rate of foreclosures behind Nevada.

Homes in Cape Coral are selling at a much faster rate than in 2007, albeit at much lower prices.

Information provided by Tate reveals that 441 single-family homes were sold in September, compared to 144 in September 2007. The lowest sale price in September was $27,000, compared to $75,000 in September 2007.

Federal help is also coming to the Cape to help reduce foreclosures. The city will receive $7.1 million sometime next year to buy foreclosed properties and get people into those homes.

The recent economic recovery package passed by Congress, tax credits for first time homebuyers and a willingness on behalf of banks and lenders to adjust mortgages will also help turn around the housing market, Tate said.

“Lenders are starting to work with people on their mortgages to lower interest rates and their monthly payments,” she said.

The changes will have to work their way through the market before a significant effect can be seen.

“In time there could be some real recovery going on,” Tate said.

 

 

 

Source: http://www.cape-coral-daily-breeze.com/news/articles.asp?articleID=22196

Fannie, Freddie regulator said U.S. backs debt: report

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 NEW YORK (Reuters) – The regulator of Fannie Mae and Freddie Mac said the federal government is trying to help the two housing finance providers sell debt on better terms, The Wall Street Journal reported on Tuesday.

James Lockhart, the director of regulator the Federal Housing Finance Agency, at the Mortgage Bankers Association’s 95th Annual Convention & Expo in San Francisco on Monday said the government has effectively guaranteed Fannie Mae’s and Freddie Mac’s debt, the newspaper reported.

“The U.S. government will be behind them short, medium and long term,” Lockhart later told the Journal in an interview, the newspaper reported.

The federal government seized control of Fannie Mae and Freddie Mac on September 7 because of fears that a failure of either of them could have severe consequences for financial markets. The two congressionally chartered companies own or guarantee nearly half of the country’s $12 trillion in outstanding U.S. mortgages.

Agency debt securities issued by Fannie Mae, Freddie Mac and the 12 regional Federal Home Loan Banks have cheapened dramatically recently, spurred by news that the Treasury plans to buy stakes in U.S. banks and the Federal Deposit Insurance Corp will provide guarantees on bank debt for three years.

The FDIC said it would try to unlock interbank lending by guaranteeing 100 percent of the senior unsecured debt of banks and other depository institutions. It also will guarantee all deposits held in non-interest-bearing transaction accounts until the end of 2009.

While a multitude of events have affected valuations, many say the last leg of the cheapening in agency debt securities. was due to the FDIC announcement.

Investors concluded that bank debt carrying the full faith and credit of the U.S. government would compete with agency debt, sparking a sell-off. The fact that debt from Fannie Mae and Freddie Mac was not included in this plan was perceived as another negative to the credit of agencies as well.

Lockhart said investors needn’t worry about Fannie Mae’s and Freddie Mac’s ability to repay their debt, because the Treasury has agreed to provide as much as $100 billion of equity capital to each company, if needed, the newspaper reported.

Source: http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20081021&id=9300525

Credit conditions improve for sixth straight day

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LONDON (AP) — Credit conditions among banks improved for a sixth consecutive trading day on Monday, particularly in the U.S., as confidence in the financial sector appeared to be improving after the rescue measures announced in recent weeks by central banks and governments.

The interbank lending rate for three-month euro loans, known as the Euro Interbank Offered Rate, or Euribor, fell 0.045 percentage points to 5.00 percent. The U.S. rate dropped more sharply, by 0.36 points to 4.06 percent.

The fall in these rates – which affect the wider economy because they establish the cost of many loans for businesses and individuals, such as mortgages – reflects greater trust in the financial sector after governments around the world have guaranteed billions of dollars worth in bank debt. Promises to rescue ailing banks, along with short-term loans from central banks, have also helped.

But while the improvements stand out, the rates remain far above their benchmark levels set by central banks, of 1.50 percent in the U.S. and 3.75 percent in the euro zone. High interest rates in the interbank market can impact the wider economy by cutting off the supply of credit to individuals and businesses, and bringing them down has been one goal of central bank and government actions over the past several weeks.

The rates were pushed so high because banks have been unwilling to lend to each other in recent months out of fears a fellow bank might collapse. With the government’s backing, this concern is fading, although lending conditions remain congested as confidence takes time to return to the system.

“Counterparty risk should certainly not be playing a role in maintaining money market spreads at high levels,” said Peter Dixon at Commerzbank in London.

Instead of worrying about other banks collapsing, credit markets are back to being where they were at the start of the year, with banks holding on to cash in case one of their own funds goes under, Dixon said.

Such fears have been exacerbated by the sharp drops in global stock markets as well as by the dawning realization that the world economy may enter a recession.

“It will undoubtedly take time before banks feel confident about lending again, but in time they will,” Dixon said.

 

Stocks dive after report on housing starts

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NEW YORK – Wall Street tumbled again early Friday after the government said new home construction dropped by more than expected last month to the lowest pace since early 1991.

Housing starts fell more than 6 percent in September to an annual rate of 817,000 units, the Commerce Department reported. That figure is lower than the 880,000 units forecast by Wall Street economists surveyed by Thomson/IFR. Building permits also sank.

The report was yet another piece of evidence that the nation is struggling with a weak economy that, if the financial crisis is not solved, could dive into a sustained downturn. President George W. Bush on Friday said in a speech that the credit market — where many companies find funding for their operations — will take a while to thaw, but that Americans should be confident that it will.

Source: http://www.msnbc.msn.com/id/3683270/

 

Overnight lending rate falls

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Bank-to-bank rates decline, indicating that the global efforts to ease pressure in the credit markets may be working.

 

NEW YORK (CNNMoney.com) — Credit markets showed signs of confidence Tuesday, the first day that the Treasury markets were open in the United States after a weekend of global initiatives to loosen frozen lending.

The overnight bank-to-bank lending rate continued to slide, with the London interbank overnight rate (Libor) falling to 2.18% from 2.47% Friday, according to data from Bloomberg.com. That followed a sharp drop-off from 5.09% Thursday. The overnight rate wasn’t published Monday because of the Columbus Day holiday in the U.S.

 

“We are not out of the woods but maybe we are getting there,” said Kim Rupert, fixed income analyst at Action Economics. “The global coordination seems to have alleviated a lot of the panic from last week and some confidence is being restored,” she added.

U.S. stocks opened sharply higher Tuesday after the government unveiled an extensive plan to help the financial sector. But major indexes turned mixed as investors resume a cautious stance after Monday’s raging rally.

The latest government developments came a day after several nations unveiled plans to guarantee bank loans and inject capital into struggling banks. And the Federal Reserve said it would offer unlimited dollars on a short-term basis at a fixed interest rate to the Bank of England, European Central Bank and Swiss National Bank.

Treasury prices were sharply lower Tuesday in a sign that demand for the safe-haven investment was shrinking, as investors look to get back to Wall Street.

 

Yet Rupert cautioned that “a lot of spreads are pretty wide, Treasury yields are relatively low and stocks have a long way to go to fully recover.”

 

Cracks in the ice: In another sign that the frozen credit markets are starting to thaw, the cost to insure Morgan Stanley’s debt – credit default swaps – has dropped dramatically.

 

Credit default swaps (CDSs) are used to transfer credit risk. Investors will buy or sell CDSs depending on how they view a company’s credit standing.

 

The credit assets are attractive to investors for two main reasons: the market is unregulated and there is very limited public disclosure. Secondly, investors make money on CDSs when companies get hit by default or other negative credit events. Therefore, the less stable a company’s balance sheet is viewed, the higher the premium.

On Friday, an investor would have had to pay 20% up front and 5% annually to insure Morgan Stanley. But on Monday, the investment firm finalized a deal to sell a part of itself to Mitsubishi UFJ (MTU) for $9 billion, reviving hopes that the Wall Street firm will survive the credit crisis. And by Tuesday, the price to insure Morgan Stanley (MS, Fortune 500) had plummeted to putting 0% down and only paying 3.9% annually, according to credit information specialist firm CMA Datavision.

Credit default swap at a glance – Fortune

 

The U.S. government said early Tuesday that it would inject up to $250 billion into banks, starting with nine, in exchange for preferred shares in the institutions.

The move “has taken a lot of risk out of [banks],” said Rupert. And declining CDSs further suggest that “investors perceive less risk of default.”

 

Cautious credit: The 3-month Libor decreased to 4.64% from 4.75% Monday, according to data from Dow Jones, but still remains at elevated levels. The measure had reached 4.82% Friday, the highest since mid-December 2007. On Sept. 15, it was only 2.82%.

 

Libor is a daily average of what 16 different banks charge other banks to lend money in London and is used to calculate adjustable rate mortgages. The higher the rate, the tougher it could be for homeowners to pay those mortgages. Libor is also used to calculate other types of loans, including student and auto.

While the overnight Libor has come down significantly, the more forward-looking lending rate remains high. “There is still some concerns over year-end funding so we still see a quite elevated rate for the 3-month,” said Rupert.

 

A market gauge known as the “TED spread” edged up to 4.30% after shrinking to 4.09% Tuesday.

The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the bigger the aversion to risk. The spread was 1.04% just a little more than a month earlier and reached a record high of 4.65% on Friday.

Another indicator, the Libor-OIS spread, retreated to 3.39% from its record high 3.67% Friday. The Libor-OIS spread measures how much cash is available for lending between banks, and is used by banks to determine lending rates. The bigger the spread, the less cash is available for lending.

 

Treasurys: Prices for government bonds, which had been on the rise as U.S. stocks plunged to record lows, reversed course Tuesday as investors shifted funds into riskier but more lucrative investments.

The fall in prices also showed investors were emerging from their bunkers, more confident in the prospects for the economy.

Typically, Treasurys are seen as the safest investment, and so when investors are uncertain about the future, investors hide their assets in the debt as a way of preserving their cash.

In addition, as the government looks to fund the expensive rescue package, they will sell bonds to raise capital and fears of a supply shock was also helping push prices lower.

 

There is “a real fear now that we have this bailout package moving that we are going to see a huge increase in Treasury borrowing in order to fund this big rescue plan,” said Rupert. The threat of a flood of supply was “adding to some of the bearishness in the bond market,” she added.

The government auctioned off $25 billion worth of 3-month bills and $27 billion worth of 6-month bills Tuesday. Both auctions were overbid.

 

The yield on the 3-month Treasury note was up as high as 0.55% before retreating to 0.27% from 0.24% late Friday as prices ticked lower. Investors and money-market funds move assets into and out of the 3-month Treasury bill frequently, as they assess risk in the rest of the marketplace.

 

The benchmark 10-year note was down 1-20/32 to 99-11/32 and its yield rose to 4.07% from 3.87% late Friday. Bond prices and yields move in opposite directions.

 

The 30-year bond sank 2-15/32 to 103-23/32 and its yield jumped to 4.27% from 4.13% Friday.

 

The 2-year note fell 12/32 to 100-11/32 and its yield rose to 1.81% from 1.60%. 

 

Source: http://money.cnn.com/2008/10/14/markets/bondcenter/credit_markets/index.htm?postversion=2008101418