Investors rush back to T-bills as credit markets worsen

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There’s a big disconnect between the stock market and the credit markets today. The former is calm, while the latter is in another panic.

Rates bank charge each other for short-term loans are soaring again, a sign that credit conditions remain in a deep freeze. One-month U.S. dollar Libor -- the London inter-bank offered rate, a banking industry benchmark -- has jumped to 3.43%, up from 3.21% on Tuesday and the highest since January.

That Libor rate has surged from 2.5% on Sept. 15, despite all of the moves the Federal Reserve has made to pump cash into the banking system over the last week.

Meanwhile, spooked investors again are hoarding short-term Treasury bills, driving yields sharply lower. The 3-month T-bill yield fell as low as 0.36% this morning from 0.72% on Tuesday, and was at 0.46% at about 12:15 p.m. PDT.

At the height of last week’s panic the 3-month T-bill yield was nearly zero, as investors were willing to accept no yield at all just to safeguard their principal. Things aren’t that bad this week, but they’re getting closer.

‘Credit markets have taken a significant turn for the worst in the last two days,’ said Michael Darda, economist at investment firm MKM Partners.

Not surprisingly, everyone’s blaming Congress: In theory, bankers don’t want to lend because they’re fearful that the $700-billion financial-system bailout package will be delayed or watered down.

The market ‘wants something to be passed,’ said Michael Pond, interest-rate strategist at Barclays Capital.

Freaked-out credit markets give Federal Reserve Chairman Ben S. Bernanke another prod in trying to push Congress to approve a bailout bill, and fast.

‘Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress,’ the Fed chief told Congress today. ‘Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.’