Treasurys drop on Fed credit plan
Wed, Dec 12 2007, 20:59 GMT
http://www.afxnews.com
NEW YORK (AP) - Treasury prices plunged dramatically Wednesday after the Federal Reserve and other central banks announced an ambitious, coordinated that program investors hope will avert a year-end liquidity crisis.
The announcement soothed mounting investor anxieties a dearth of funding in late month that could further slow the economy, sparking sharp gains for stocks and sending Treasury prices reeling and yields sharply higher. The prospect of more available credit lessened investors' need for the safe haven that government securities provide.
The Fed announced a deal with the European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank to create a temporary auction facility to keep banks funded.
The central banks' action was designed to address "elevated pressures" in credit markets, according to the Fed. The pact also will include setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.
Although the international problems caused by the global spread of bad U.S. mortgage debt are serious and unwieldy, analysts said the concerted effort should, at minimum, produce temporary benefits.
"This is a massive, historical liquidity injection," said T.J. Marta, fixed-income analyst at RBC Capital Markets. "There is no silver bullet because the problems are so massive, but this is a very significant step."
The likelihood that the program will at least diminish short-term market stress also should reduce the unusually heavy demand for Treasurys seen in recent weeks.
"The facility should reduce funding pressure and, in as much as it does improve liquidity, there will be less fear of a huge system failure at year end," said Kim Rupert, managing director for fixed-income at Action Economics. "And that reduced demand for Treasurys."
The benchmark 10-year Treasury note fell 1 17/32 to 100 28/32 with a yield of 4.14 percent, up sharply from 3.97 percent late Tuesday.
The 30-year long bond plunged 1 14/32 to 106 23/32 with a yield of 4.58 percent, up from 4.47 percent late Tuesday.
The 2-year note gave up 16/32 to 99 28/32 with a yield of 3.19 percent, up from 2.92 percent late Tuesday.
Unusually heavy selling Wednesday caused Treasury prices to give back all the gains registered just one day before when the Federal Reserve put in place a rate decision that was not as generous as many investors hoped for.
The Fed on Tuesday ordered 0.25 percentage point reductions in both the overnight federal funds target and the discount rate, the interest at which it makes loans to commercial banks. The action was viewed by many investors as too paltry, given the unusual pressures that problems in the subprime mortgage sector have put on global financial markets this year.
Severely shaken investors Tuesday staged a heavy stocks sell-off while funneling large amounts of money into Treasurys.
The Fed's foreign exchange swap lines with the European Central Bank and the Swiss National Bank under the new program should allow the central banks to help stabilize the entire London interbank loan, or LIBOR, system, according to RBC Capital Markets' Marta.
LIBOR rates in many currencies have moved sharply higher as credit market problems accelerated and commercial banks grew wary of lending to each other. Banks are thought to be hoarding cash to build a cushion against possible future writedowns on bad mortgage assets and to square their books at year-end.
The unwillingness of banks to loan to each other has compounded both the liquidity and the confidence crises in the markets. These problems have restricted currency trade, too.
"If the Fed were only able to flood the system with dollars, the impact would be limited," Marta said. "But the cross currency swaps will help out all the currencies."
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