Treasury bill rates fall even as stocks rebound

Major stock indexes shot up more than 10 percent this week, but yields on Treasury bills fell anyway - suggesting demand is still high for the ultimate safe investment.

While investors are relieved that the credit markets are functioning better than they were a few weeks ago, they're not about to rush into risky assets just yet.

"Business can be conducted, but at the same time, everybody - all companies, individuals - are just spooked about what's happening," said Axel Merk, portfolio manager at Merk Funds.

The three-month Treasury bill yielded 0.43 percent Friday, up from 0.37 percent Thursday but well below 0.87 percent last Friday. The discount rate was also 0.43 percent.

Part of the decline is due to the Federal Reserve's decision to reduce the key interest rate by a half-point to 1 percent - the key rate indirectly affects T-bill rates. But normally, the 3-month T-bill should be just below the target rate, not half its level.

Kevin Giddis, fixed-income analyst at Morgan Keegan, wrote in a note that the three-month T-bill rate should be between 0.60 percent to 0.75 percent for him to "feel good about short-term investor confidence in where the cash is going."

The current yield levels indicate that investors who rushed into T-bills after Lehman Brothers Holdings Inc. collapsed aren't letting them go - even after the actions by governments around the world to buy riskier assets that it normally does, like commercial paper, and pump the global financial system with dollars.

Bank-to-bank lending rates are still coming down, a sign that financial institutions are less worried about lending to one another. The London Interbank Offered Rate, or Libor, for three-month dollar loans tumbled to 3.03 percent Friday from 3.19 percent Thursday - that's down from 3.54 percent a week ago and down from its Oct. 13 peak of 4.82 percent.

Many consumer loans are linked to Libor, such as adjustable rate mortgages.

But this slide in Libor is occurring because of four major factors, according to Miller Tabak & Co.'s Tony Crescenzi. Three European central banks have been providing unlimited dollar funding to private banks; the Federal Reserve is now buying the short-term debt known as commercial paper from companies, relieving the banks providing credit to those companies; the U.S. government is deploying funds into the banking system; and the Fed has suggested that interest rates should remain low for some time.

Commercial paper rates have been falling and volumes have been rising since the Fed on Monday began buying the paper, which is short-term debt companies sell for day-to-day financing.

That effort, though, costs money, as do the other actions that the government has promised.

"It's one thing to stabilize the system, but it's extremely expensive to stabilize the system. It does make one believe that much of this is being propped up by government help," Merk said. "That's obviously better than the collapse we would've had, but it also means things are far, far from normal."

Because of the uncertainty about how much money the Fed is going to have to raise by selling debt, investors have been nervous about buying long-term Treasurys - keeping their yields from falling as much as they normally would in an economic downturn. And some consumer loans are tied to long-term Treasurys - most importantly, fixed-rate mortgages.

The average 30-year fixed mortgage rate was 6.46 percent Friday, according to Bankrate.com, up from 5.96 percent a week ago, and the average 15-year fixed mortgage rate was 6.08 percent, up from 5.59 percent.

On Friday, the 2-year note was flat at 99 28/32 and yielded 1.57 percent, the same as late Thursday. The 10-year note rose 1/32 to 100 10/32 and yielded 3.96 percent, down from 3.97 percent. The 30-year bond fell 17/32 to 102 6/32 and yielded 4.37 percent, up from 4.33 percent.