Credit markets hint at improvement, but it’s not much

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Wall Street is desperately looking for signs of a thaw today in the credit markets, as the world’s major central banks fire one of the last bullets in the gun: coordinated cuts in short-term interest rates.

There are some hints of improvement: Fannie Mae today sold $1 billion of three-month bills at a yield of 1.55%, down from 2.35% at last week’s sale.

Although Fannie Mae has essentially been nationalized, some investors still have been unwilling to buy the company’s debt, preferring Treasury securities instead.

So the sharp decline in Fannie’s three-month bill yields today suggests ‘a movement toward risk- taking,’ says Tony Crescenzi, bond market strategist at Miller, Tabak & Co. in New York.

That’s what central banks are trying to encourage: They want to persuade investors to stop hoarding cash and start putting that money to work in the markets.

Another market shift today is harder to read: Longer-term Treasury bond yields have jumped, with the 10-year T-note rising to 3.73% from 3.51% on Tuesday. The two-year T-note is at 1.62%, up from 1.46%.

That could be a sign that investors are selling Treasuries to buy riskier securities.

But the Treasury market also has been riled by the government’s surprise decision to immediately sell $66 billion in new bonds today, to ease what it called ‘severe dislocations’ in debt markets.

‘It’s a lot of supply’ for the market to absorb at once, said Brian Edmonds, head of interest rates at Cantor Fitzgerald in New York. That may be a bigger reason for the jump in longer-term yields than a sudden desire to take more risk, he said.

Meanwhile, there’s no sign that investors want to give up the safest of their Treasuries: The yield on three-month T-bills has slipped to 0.69% from 0.77% on Tuesday.