Treasurys drop on $200B Fed credit plan
Investors seek greater profit elsewhere as Federal Reserve moves to support banks and avoid another rate cut.
NEW YORK (AP) -- Treasury prices sold off sharply Tuesday after the Federal Reserve and other major central banks unveiled a plan to offer up to $200 billion in Treasurys to cash-starved financial institutions.
The liquidity effort, called the Term Securities Lending Facility, is the latest central bank program designed to provide necessary operating capital to banks and keep financial markets in order. Defaults on bad mortgages and other credit assets have caused a liquidity crunch that has hurt lending, rattled nervous global markets and strained an already slowing economy.
The new program will offer Treasury bills to primary dealers through four-week auctions, a marked change from a current program that operates only on an overnight basis. In essence these auctions, to be held weekly, will provide one-month loans to the major investment firms that work with the Fed and recently have struggled to function with declining liquidity.
The program will accept a broad range of collateral, including federal agency debt and mortgage-backed securities of Fannie Mae (FNM) and Freddie Mac. (FRE, Fortune 500) This should be a major boon to financial markets which in recent sessions have recoiled from many forms of mortgage debt, a development that forced such firms as Carlyle Capital Corp (CARYF) to miss margin calls on mortgage debt.
Although the $200 billion on offer will be in the form of Treasurys, government bond prices slipped badly as investors for the moment hunted for investments with more promising profit potential. The news sparked a massive stocks rally and brought relief to the badly battered dollar.
The benchmark 10-year Treasury note fell 1 8/32 to 99 7/32 with a yield of 3.60%, up from 3.46% late Monday, according to BGCantor Market Data. Prices and yields move in opposite directions.
The 30-year long bond lost 1 1/32 to 97 15/32 with a yield of 4.53%, down from 4.47 %.
The 2-year note gave up 18/32 to 100 17/32 with a yield of 1.73 %, up from 1.49%.
The yield on the 3-month note shot up to 1.49% from 1.32% Monday as the discount rate advanced to 1.46% from 1.30%.
There were mixed views as to how well the new auction process will work. Merrill Lynch & Co. Inc. Economist David Rosenberg cautioned in a research note, "the size of the auctions, while sizable in terms of the Fed's balance sheet, are actually fairly small in light of the overall credit situation and in no way does this solve -- or is intended to solve -- the massive writedowns and losses in the banking sector that are ongoing in this cycle."
However, Action Economics Chief Economist Mike Englund said the purpose of the auctions is just to create suitable trading conditions for mortgage-backed debt that investors have been afraid to trade. In recent months, a near-dearth of buyers has made it almost impossible to determine accurate prices for many mortgage assets. But the auctions should revive the market for mortgage-backed securities and provide a pricing mechanism, he said.
Central banks work together. The new auction program also shows that the Fed and other central banks are determined to find ways to boost liquidity beyond the conventional tactic of cutting interest rates. The Fed is working in concert with the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank.
The Fed is scheduled to hold a monetary policy meeting next Tuesday. Prior to the auction announcement, investors had expected a rate reduction of up to 0.75 percentage point. However, Ian Shepherdson, chief U.S. economist at High Frequency Economics, said such a large rate cut is less likely now that the new program exists.
The Fed may be looking for ways to avoid further drastic rate cuts in the Fed funds target rate, currently at 3%. This is because the rate cuts, along with a vigorous commodities rally, are blamed for unloosening a brisker rate of inflation in the economy.
On Tuesday crude for April jumped to a new record price of $109.72 a barrel in New York trade, indicating the commodities rally has yet to crest.
Separately, the Commerce Department reported that the nation's trade gap widened a bit in January, after higher oil prices reduced the impact of stronger U.S. exports. The trade gap rose 0.6% to $58.2 billion in the first month of the year. |
