Treasury 3-Month Bill Yields Fall Below 3% on Credit Concern

By Deborah Finestone and Sandra Hernandez


Nov. 29 (Bloomberg) -- Treasuries rose and three-month bill yields fell below 3 percent for the first time since August as concern over banks' willingness to lend drove investors to the relative safety of U.S. government debt.

The interest rate that banks charge each other for borrowing in dollars for one month rose the most in more than a decade as banks sought to cover their commitments through the start of 2008. Yields on notes fell as futures traders increased bets that the Federal Reserve will cut borrowing costs a half- percentage point next month to prevent a recession.

``The credit crunch began in earnest back in July, but what you're seeing now is it's deepening and spreading out,'' said Kathleen Bostjancic, an economist in New York at Merrill Lynch & Co., which expects the Fed's target lending rate to fall to 2 percent by the end of the second quarter of 2009. ``You're seeing a tremendous flight to quality.''

The three-month bill's yield fell 7 basis points, or 0.07 percentage point, to 2.96 percent at 4 p.m. in New York, after touching 2.89 percent earlier. Yields on 10-year notes decreased 11 basis points to 3.95 percent.

In a sign of banks' reluctance to lend to each other, the difference between three-month bill yields and the London interbank offered rate, or Libor, was the widest in three months. The ``TED'' spread increased 12 basis points to 2.16 percentage points, the biggest since Aug. 20, when money-market funds dumped assets linked to a collapsing U.S. mortgage market in favor of the shortest-maturity government debt. The spread has more than doubled this month.

Libor Rises

Investors bought government debt as one-month Libor for dollars jumped 40 basis points to 5.23 percent, the British Bankers' Association said. Today is the first day a cash loan of one month will cover a borrower's needs through the end-of-year holiday period.

The rate rose to 72.5 basis points above the Fed's 4.5 percent target for overnight lending between banks, the highest since Sept. 18, when the central bank cut its benchmark a half- percentage point.

The spread was only higher in 1999 on concern over possible computer glitches associated with the changeover to the new millennium, and in 1998 over the collapse of Long-Term Capital Management LP, according to T.J. Marta, a fixed-income strategist in New York at RBC Capital Markets.

``Not exactly good company to be keeping,'' he said. ``The markets are just so uncertain at this point. There's more than just a year-end liquidity problem.''

December Outlook

Fed funds futures on the Chicago Board of Trade show traders see a 34 percent chance that the central bank will lower its benchmark borrowing cost to 4 percent at its meeting Dec. 11, compared with 6 percent yesterday. That pushed down the odds that the rate will be reduced to 4.25 percent to 66 percent, from 94 percent yesterday.

Price swings in U.S. government debt reached the highest since September 2003 this week. Merrill Lynch's MOVE index, a measure of expectations for Treasury volatility, rose to 133.4 on Nov. 27. The index, based on prices of over-the-counter options on Treasuries maturing in two to 30 years, has risen from a record low of 51.2 on May 15.

``Certainly it feels a lot like the Long-Term Capital Management crisis,'' said Vincent Boberski, senior vice president of portfolio strategies in Chicago at FTN Financial.

Treasuries are set for their best monthly performance since September 2003, returning 2.74 percent, according to Merrill Lynch. U.S. government debt has returned 8.61 percent this year, headed for the best performance since 2002.

Corporate Debt

While short-term lending rates have spiked, borrowers and banks are selling the most corporate bonds in at least seven weeks. Companies plan to issue at least $11.1 billion today after raising $8.8 billion in offerings yesterday.

Those planning to sell debt include PepsiCo Inc., the second-largest U.S. soft-drink maker.

Many of the offerings are from companies that are ``not exactly names that are going to cause portfolio managers to lay awake at night because of the credit situation,'' said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management. ``And it's coming cheap, at very attractive levels.''

The average investment-grade corporate bond yields are 194 basis points higher than government debt, more than double the spread in June, according to Merrill Lynch indexes.

The yield on five-year notes dropped 9 basis points to 3.41 percent, remaining lower after the government's auction of $13 billion in new debt drew the weakest demand since July. The Treasury sold the notes at a yield of 3.415 percent, lower than the average forecast of bond traders surveyed by Bloomberg.

Investors bid for 2.26 times the amount of debt being sold. For the past 10 sales, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, averaged 2.48.