Investors move to safety of Treasury bills

NEW YORK — The credit markets were thrown into further turmoil Monday after the House rejected the government's proposed financial-bailout plan, sending investors swarming again for the safety of Treasury bills.

As the Dow Jones industrial average plunged nearly 780 points, the yield on the three-month Treasury bill fell to 0.46 percent from 0.87 percent late Friday, after dropping as low as 0.32 percent. Low yields show that investors are prepared to get meager returns on an investment as long as it is secure.

John Spinello, bond strategist at Jefferies, called the moves in both bonds and stocks "violent."

"We're dealing with moment-to-moment, dynamic action that's so hard to describe," he said.

Earlier Monday, LIBOR, or London Interbank Offered Rate, for 3-month dollar loans had risen to 3.88 percent from 3.76 percent on Friday, suggesting that banks have grown increasingly unwilling to lend to each other. LIBOR for three-month euro loans, meanwhile, soared to 5.22 percent, the highest rate ever.

And other lending rates increased from already lofty levels — including those on short-term company debt known as commercial paper, and those on overnight loans in the repo markets, where banks and other institutions do temporary borrowing.

To be sure, some of the problems in the credit markets, where corporate borrowers go to find loans, have been feeding on themselves. Much of the recent tightness in the markets has been caused by investors waiting for the outcome of the rescue package, which proposed to allow the Treasury to spend up to $700 billion buying banks' souring mortgage-backed debt.

"I think everybody focusing on Washington froze the credit markets," said Howard Simons, strategist with Bianco Research in Chicago. Knowing the government under the plan would buy mortgage-backed securities but not knowing how they would go about it, or how much they would pay for them, kept other potential buyers in wait-and-see mode, he said.

But while it is possible that the fears are overblown, few are willing to make contrarian bets — particularly given how many times academics, government officials and bank executives called a bottom to the global financial systems' woes, only to have their predictions blow up in their faces.

The global financial landscape continues to change, keeping large and small investors alike on edge.

"Right now, banks don't trust one another," said Axel Merk, portfolio manager at Merk Funds. Even if the rescue package does get approved eventually, it "is a tool that the Treasury can use, but it's not the solution to all the problems out there."

Citigroup acquired Wachovia on Monday in a deal brokered by the government. That development follows Washington Mutual's becoming the largest bank to fail in U.S. history; Lehman Brothers becoming the largest company to file for bankruptcy; the government takeover of insurer American International Group and mortgage financiers Fannie Mae and Freddie Mac; and Bank of America's shotgun buyout of Merrill Lynch.

The mortgage crisis is also ripping through Europe, where there are many large banks whose failures could rock the global financial system.

The British government is nationalizing the troubled mortgage lender Bradford & Bingley, while Belgium, the Netherlands and Luxembourg agreed to buy a 49 percent stake in Fortis NV for $16.4 billion.

"In the U.S. anyway, the bailout plan might help to stabilize the system. Now we have to worry about the rest of the world," Merk said. He added that European countries' short-term government debt was also in extremely high demand Monday.

In another move to try to keep the global financial system functional, the Federal Reserve said it was doubling the total amount of cash loans to banks to $300 billion, and making $620 billion available to other central banks through currency swap arrangements, up from $290 billion.

Longer-term Treasury prices soared as stocks tumbled.

The 2-year note rose 25/32 to 100-20/32, and its yield dropped to 1.69 percent from 2.06 percent. The 10-year note rose 2-3/32 to 103-9/32 and yielded 3.63 percent, down from 3.82 percent.

The 30-year note jumped 4-4/32 to 106-8/32, and its yield fell to 4.16 percent from 4.36 percent.

The U.S. economy is still weakening. The Commerce Department said consumer spending was flat in August — the worst reading since February, when spending was also unchanged from the previous month.

Most financial experts agreed that the $700 billion bailout plan would have at least helped create a market for mortgage debt.

"The key point is, once you get those assets off the market, then for the first time you've got a fighting chance at starting the market in mortgage-related finance," said Lou Crandall, chief economist at Wrightson ICAP.

But as vulture funds — big investors that specialize in buying high-risk assets for cheap — prepared to pounce, they were waiting to make sure the market did not have further to fall.

"As long as the Fed and Treasury are trying to keep things in a holding pattern," Crandall said, "potential buyers feel no sense of urgency."