Cost of lending rises as banks worry about funding, yields on long-term government debt sink to record lows.
LONDON (AP) -- Yields on long-term government debt sank to new record lows Friday, the last trading day of the month, as investors continued to bet on an extremely weak economy.
The 30-year yield dropped to 3.44%, the lowest level since the government started issuing the bond. The 10-year yield also fell to the lowest level since it's been issued, sinking to 2.93%.
To be sure, trading volumes were thin during Friday's abbreviated session after the Thanksgiving holiday, which can exacerbate movements. And the stock market has been showing signs of strength; the Dow Jones industrial average rose 102 points for its fifth straight daily gain.
But this month's action in the Treasury markets suggests that most investors are still very cautious - a sentiment that could continue into December if the market doesn't get to see better readings on the economy.
"There's lots of rationale for why one would want to buy and hold Treasurys," said Kim Rupert, managing director of global fixed income analysis at Action Economics. The economic outlook is already grim, she said, and next week's heavy calendar of economic data is "probably going to be nothing but bad news."
Holiday sales
Next week will bring data on holiday sales; Friday's anecdotal evidence suggested that shoppers were flocking to stores but keeping tight budgets. Economists were also anticipating poor readings next week on the manufacturing sector, the service sector, auto sales, factory orders and employment.
The 2-year Treasury note rose 7/32 to 100 15/32, and yielded 1.01%, down from 1.12%. The 10-year note rose 16/32 to 107 1/32 and yielded 2.93%, down from 2.99%. The 30-year bond rose 1 19/32 to 119 13/32 and yielded 3.44%, down from 3.52%.
The rate on the 3-month Treasury bill barely budged to 0.03% from 0.02% - indicating that investors were willing to earn virtually nothing for the safety of short-term government debt.
Tight lending
Meanwhile, bank-to-bank lending rates rose for the second day running Friday amid ongoing funding concerns despite the rescue of Citigroup Inc. (C, Fortune 500) earlier in the week.
The rate on 3-month loans in dollars - known as the London Interbank Offered Rate, or Libor - rose about 0.01 percentage points to 2.22%, according to the British Bankers' Association.
Interbank rates affect the cost of loans in the wider economy, for both businesses and individuals. Rates have skyrocketed in recent months as banks worried that other lenders might collapse.
When compared with Treasury yields, they are also a gauge of fear in the credit markets. The spread between the 3-month dollar Libor and the 3-month Treasury bill yield has narrowed over the last month or so after massive intervention from governments and central banks, but remains historically high at over 2 percentage points. That spread is normally well below 1 percentage point.
One bright spot has been the commercial paper market, where companies sell short-term debt to raise cash for day-to-day operations. Since the Federal Reserve started offering to buy commercial paper, the market has been healthier. In the week ended Wednesday, commercial paper outstanding rose by $26.2 billion to $1.64 trillion, the Fed said Friday. |
