Panic ebbs in the credit markets; Treasury yields edge up
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Fear got a modest downgrade in the credit markets today.
Amid hopes for a new U.S. effort to deal with the crush of bad debt weighing on the financial system, the panic that has gripped bond investors in recent days ebbed a bit.
That was evident in the market for Treasury securities, which had been the favored haven for the petrified: Yields rose on longer-term T-bonds as some investors and traders cashed out.
The yield on the two-year T-note, which hit a five-month low of 1.64% on Wednesday, inched up to 1.70% today. The 10-year T-note rose to 3.55% from 3.42%.
The talk in Washington was that the government may create an entity to soak up some of the financial system’s bad debt -- akin to Resolution Trust Corp., which was formed in the late 1980s to deal with the garbage left by the S&L industry bust.
There were no details, just rumors. The Associated Press reported that Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke were to address congressional leaders in a meeting beginning at 4 p.m. PDT in Washington.
The stock market was the biggest beneficiary of the rumors, with the Dow Jones industrial average turning a 150-point midday drop into a 410-point gain by the closing bell, to 11,019.69.
The credit markets still had to contend with frozen conditions in key markets, including commercial paper, and with worries about nervous investors fleeing money market mutual funds, which until recently held $3.5 trillion in assets.
Boston-based Putnam Funds today said it decided to close its institutional Putnam Prime Money Market fund and would liquidate the $12.3-billion portfolio, after big investors rushed to get their cash out.
The trigger for the redemptions almost certainly was the announcement Tuesday by the Reserve Primary fund, a large New York-based money fund, that it had ‘broken the buck’ -- fallen below the standard $1 a share -- because of losses on IOUs from brokerage Lehman Bros. Holdings Inc.
Spooked investors pulled $169 billion from money funds in the week ended Wednesday, reducing total industry assets by 4.7%, to $3.41 trillion, the Investment Company Institute said.
Many money funds appeared to be continuing to hoard short-term Treasury bills that they could sell quickly if needed to meet additional investor redemptions, bond traders said. ‘There’s still a huge appetite for bills in general,’ said John Canavan, a fixed-income analyst at Stone & McCarthy Research in Skillman, N.J.
The three-month T-bill yield, which plunged from 0.7% on Tuesday to a mere 0.06% on Wednesday as panicked investors rushed for safety, edged up to 0.08% today.
That wasn’t much of a rebound -- showing that, for some investors, return of principal remains far more important now than return on principal.