Monday, August 20, 2007

Treasury yields fall more than after 9/11 attacks.

Treasury Bill Yields Fall Most Since 1987 on Money Fund Demand
By Deborah Finestone and Elizabeth Stanton

Aug. 20 (Bloomberg) -- Yields on U.S. Treasury bills fell the most in two decades on demand for the safest securities amid concern over a widening credit crunch.

Bill yields have fallen five straight days as money market funds dumped asset-backed commercial paper in favor of the shortest-maturity government debt. Three-month yields dropped the most since the stock market crash of 1987 and more than in the wake of the Sept. 11, 2001, terror attacks in the U.S, as funds shunned assets that may be linked to a weakening mortgage market.

``The market is totally, absolutely, completely in fear mode,'' said John Jansen, who sells Treasuries at CastleOak Securities LP in New York. ``People are afraid that lots and lots of mortgage paper and mortgage paper derivatives of all sorts is completely opaque and they can't price it.''

The three-month Treasury bill yield fell 0.82 percentage point to 2.94 percent as of 2:54 p.m. in New York. It's the most since Oct. 20, 1987, when the yield fell 85 basis points, or 0.85 percentage point, on the day the stock market crashed, and eclipses the drop of 39 basis points on Sept. 13, 2001, the day the Treasury market reopened after the attacks. The yield has fallen from 4.69 percent on Aug. 13. The bills yielded about 7 percent in mid-October 1987, and 3.2 percent in the days before the September 2001 attacks.

``The psychotic atmosphere that's gripped the markets recently is still in place,'' said Tony Crescenzi, chief bond market strategist for New York-based Miller Tabak & Co. ``This is quite evident in the way the T-bill market is acting.''

`Get into Treasuries'

The flight to government debt helped the U.S. Treasury sell $21 billion in three-month bills today at a high discount rate of 2.85 percent, the lowest since 2.8 percent on May 16, 2005.

Investors fled even money market funds, considered among the safest instruments, on concern that the funds, which hold $2.5 trillion, have invested in risky collateralized debt obligations backed by subprime mortgage loans.

``We had clients asking to be pulled out of money market funds and wanting to get into Treasuries,'' said Henley Smith, fixed-income manager in New York at Castleton Partners, which oversees about $150 million in bonds. ``People are buying T-bills because you know exactly what's in it.''

The Federal Reserve Bank of New York said in a statement it won't re-invest the $5 billion of Treasury bill holdings maturing on Aug. 23 through its System Open Market Account to give it ``greater flexibility'' to manage reserves. It is the first time the Fed redeemed the Treasury bills since the 2001 terrorist attacks. Crescenzi said the move shows the Fed expects banks to borrow that much at the Fed's discount window.

Job Cuts

Treasuries headed higher earlier after SunTrust Banks Inc., the seventh-largest U.S. bank, said it expects to eliminate 2,400 jobs by the end of next year as part of a plan to cut costs. That may signal the credit crunch in the U.S. will cost jobs and may slow the economy.

The yield on the benchmark two-year note fell 11 basis points to 4.08 percent. The price of the 4 5/8 percent security due in July 2009 rose about 6/32, or $1.88 per $1,000 face amount, to 101.

Investors' focus is turning to ``the amount of job cuts you're going to have from this fallout,'' said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada's biggest bank.

Slower Economy

More than half of the 21 primary government security dealers that trade with the Fed now expect the central bank to cut its target interest rate by next month from the current level of 5.25 percent.

``The Fed is going to lower the funds rate, it's a question of when,'' said Thomas Tierney, head of U.S. Treasury trading at Citigroup Global Markets Inc. in New York. ``Credit's gotten tighter, and it's going to slow the economy.''

The Fed on Aug. 17 cut the rate it charges banks for direct loans to banks by 0.5 percentage point to 5.75 percent. It was the first reduction in borrowing costs between scheduled meetings since 2001. The central bank said in a statement that risks to the economy have risen ``appreciably.''

The move failed to revive demand for asset-backed commercial paper in Europe. Solent Capital Partners LLP, a London-based credit-fund manager, is seeking to draw on emergency financing after it couldn't borrow in the commercial-paper markets.

``There is a lot to roll over in the commercial paper market and that has people getting nervous,'' said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut at primary dealer RBS Greenwich Capital.

Interest-rate futures traders see a 100 percent change the fed will lower its overnight lending rate between banks by its next meeting on Sept. 18. Eighty-six percent of those bets are for rates to drop to 4.75 percent, while the balance is for a cut to 5 percent.

To contact the reporters on this story: Deborah Finestone in New York at ; Elizabeth Stanton in New York at


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