Treasury Three-Month Bill Yields Fall Most Since 2001 on Credit

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Treasury three-month bill yields fell in August by the most in almost six years as subprime mortgage losses weakened credit markets, encouraging investors to take refuge in the shortest-term government debt. Investors bought bills this week as the commercial paper market extended its biggest slump in at least seven years. President George W. Bush yesterday announced a plan to contain mortgage defaults, and Federal Reserve Chairman Ben S. Bernanke said he would ``act as needed'' to contain the housing recession. A government report next week forecast by economists to show job growth accelerated in August may reduce the likelihood of a cut in interest rates by the central bank.
``The Fed only needs to avert a seizing up of the financial system, but I don't think they'll do it by means of a rate cut,'' said Christopher Sullivan, who oversees $1.3 billion as chief investment officer in New York at United Nations Federal Credit Union. ``We only have a relatively small pocket of problems, and the broader economy is doing relatively well.''
The yield on the three-month Treasury bill fell 84 basis points, or 0.84 percentage point, to 4.11 percent in August, according to Bloomberg data. It was the biggest monthly drop since September 2001, when the terrorist attacks increased demand for government debt.
Commercial paper outstanding has fallen $244.1 billion, or 11 percent, in the past three weeks, suggesting the Fed's reduction in the discount rate on Aug. 17 hasn't enticed buyers back into the market.
Commercial Paper `Fear'
``There's that fear of commercial paper that's driving people into the bills market,'' said Nasri Toutoungi, who oversees $23 billion of bonds in Hartford, Connecticut, at Hartford Investment Management Co.
An $18 billion auction of two-year notes on Aug. 29 drew the most demand since 1992. The government sold $53 billion of notes and bonds in four auctions last month including the $13 billion of five-year notes on Aug. 30.
Two-year note yields fell 39 basis points last month, the most since September 2003, to 4.13 percent. Benchmark 10-year note yields decreased 21 basis points to 4.53 percent after touching a five-month low of 4.48 percent on Aug. 29.
Home prices fell by a record amount in the second quarter as sales fell and mortgage lenders made it tougher to get a loan. Home values dropped 3.2 percent in the three months through June from the same period a year before, according to an Aug. 28 report by S&P/Case-Shiller.
The New York-based Conference Board reported the same day that its index of confidence fell in August the most since just after Hurricane Katrina two years ago.
Fed `to Ease'
``The Fed will eventually have to ease,'' said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., which manages $90 billion in fixed-income assets.
Treasuries returned 1.7 percent in August, according to an index compiled by Merrill Lynch & Co. A gauge of U.S. corporate bonds rose 1.1 percent.
Bush pledged to help people who've fallen behind in their mortgages and tighten safeguards against predatory lending, while rejecting a bailout for ``speculators.'' He will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates.
Bernanke, speaking in Jackson Hole, Wyoming, suggested the central bank is considering all options between now and the Sept. 18 policy meeting.
`Open Question'
A rate cut in September ``is still an open question,'' said George Goncalves, chief Treasury and agency strategist at Morgan Stanley, one of the 21 primary dealers that trade directly with the central bank. ``The Fed wants to be flexible. Expectations of massive rate cuts have been minimized.''
Investors added $83 million to high-yield bond funds, the first infusion in 12 weeks, seeking to capitalize on gains in high-risk debt, JPMorgan Chase & Co. said Aug. 30, citing Arcata, California-based AMG Data Services. The increase signals the panic that caused money markets to freeze up and delayed 50 bond sales may be abating.
Interest rate futures traders saw a 46 percent chance the Fed will cut the target rate for overnight lending between banks half a percentage point by its meeting Sept. 18, down from 64 percent odds a day earlier. Futures suggested a 54 percent chance of a quarter percentage point cut, up from a likelihood of 36 percent.
The Fed lowered the discount rate on direct loans to banks by half a percentage point to 5.75 percent to help avert a credit crisis. It held its main lending rate at 5.25 percent 10 days earlier.
U.S. employers probably added 109,000 new jobs last month, up from 92,000 a month earlier, according to the median forecast of 70 economists surveyed by Bloomberg News. The jobless rate was forecast to remain at 4.6 percent. The Labor Department is scheduled to release the payroll data Sept. 7.