NEW YORK (AP) _ Government bond prices tumbled Friday as the U.S. government said it was drafting a plan to rescue the nation's embattled banks, leading investors to take their money out of Treasurys and put it back into stocks.
Stocks also jumped due to the Treasury's promise to guarantee money market funds and the Securities and Exchange Commission's ban on financial stock short sales. The Dow Jones industrials spiked 368 points Friday, and essentially erased its losses from earlier in the week.
Investors started the week running to the safety of Treasurys and commodities such as gold, worried that any other asset might plunge after Lehman Brothers Holdings Inc.'s bankruptcy and the government bailout of the insurer American International Group Inc.
Short-term Treasurys had seen especially high demand, given the seize-up in the credit markets such as the repo, or repurchase markets. The repo markets are temporary loan markets used by banks and other institutions for stashing their capital in the short-term.
But by Friday, the 3-month Treasury bill — deemed one of the most secure short-term investments — was seeing significantly lower demand. The 3-month yield rose back up to 0.94 percent from 0.07 percent late Thursday. Its discount rate stood at 0.93 percent. At several points this week, the 3-month T-bill's yield fell below zero, for the first time since 1940; that means that a buyer would take a small loss on the investment after three months. Many were willing to risk a minor loss compared to the nosedive investments were taking on Wall Street.
Other Treasury yields jumped, too.
The benchmark 10-year Treasury note sank 2 1/32 to 101 17/32 late Friday. Its yield rose to 3.81 percent from 3.53 percent late Thursday, according to BGCantor Market Data. Yields move in the opposite direction from prices.
Also late Friday, the 30-year long bond fell 3 3/32 to 101 14/32, while its yield rose to 4.41 percent from late Thursday's rate of 4.18 percent. The 2-year note fell 27/32 to 100 12/32, while its yield rose to 2.18 percent from 1.65 percent late Thursday.
One of the selling drivers Friday was the belief that if the government decides to take on banks' risky assets, they're going to have to raise revenue — and one way they do that is by issuing Treasurys, said T.J. Marta, fixed-income analyst at RBC Capital Markets. Higher supply means lower prices.
However, with the economic picture still looking bleak, Treasury yields should be capped, at least for shorter-term Treasurys, Marta said.
"The trajectory of the economy is down. The trajectory of inflation is down. And that suggests that no one is going to price in a Fed hike anytime soon," Marta said. When the Fed raises the key interest rate, it tends to dampen Treasury prices.
Just this week, the financial markets have been slammed by a snowballing of events that led to the government deciding to draft a plan to save the banks.
Those events included the bankruptcy of investment bank Lehman Brothers Holdings Inc.; the sale of Merrill Lynch & Co. to Bank of America Corp.; American International Group Inc.'s $85 billion government bailout; a money-market fund with exposure to Lehman that failed to maintain assets of at least $1 for every dollar invested; and another mutual fund that was shuttered due to fleeing investors.
Some market participants believe the plan will resemble the Resolution Trust Corp., or RTC, of 1989 in the wake of the savings and loan crisis. The RTC bought the S
Ls' assets, sold them off over several years, then dissolved.