Credit still crunched even as mortgage rates fall

NEW YORK (AP) -- Mortgage rates sank again Wednesday, but investors are worried that getting a loan will still be a tough feat.

The credit markets, while not as crunched as they were last week ahead of the rescue of Citigroup Inc. and the Federal Reserve's plan to buy $600 billion in mortgage-backed securities, are still in rough shape because financial institutions and other investors remain wary about lending. Short-term Treasury rates remain just above zero - suggesting a high level of fear among investors.

"You're seeing modest, ever so modest, easing in credit conditions. But you can't declare victory when the patient on the deathbed goes to critical. It's still dire," said T.J. Marta, fixed-income analyst at RBC Capital Markets.

There are several questions facing potential lenders right now that are hindering them from making loans: Which borrowers are creditworthy right now? How much worse will the housing market get before it rebounds? How much will other kinds of loans deteriorate?

With no definitive answers yet to these questions, confidence remains extremely low, despite the government's huge injections of cash into the markets to keep the entire system from collapsing outright. And no one knows for sure when or how that confidence will be restored.

As the rate on a 30-year Fannie Mae mortgage security fell to about 5.09 percent on Wednesday - down from Tuesday and from over 5.5 percent earlier this month - the yield on the three-month Treasury bill slipped, too, to 0.03 percent from 0.09 percent on Tuesday. The discount rate was 0.04 percent.

A lower yield indicates higher demand, and shows how little investors are willing to earn to protect their principal.

Longer-term Treasurys also rose, driving yields lower. The 2-year note rose 5/32 to 100 8/32 and yielded 1.12 percent, down from 1.18 percent. The 10-year note rose 1 2/32 to 106 15/32 and yielded 2.99 percent, down from 3.10 percent. The 30-year bond rose 2 4/32 to 117 27/32 and yielded 3.52 percent, down from 3.62 percent.

The U.S. bond markets closed early on Wednesday ahead of the Thanksgiving holiday on Thursday.

Bank-to-bank lending rates fell Wednesday, but only modestly in relation to Treasurys - suggesting that banks are not lending more freely. The difference between the three-month T-bill yield and the three-month London interbank offered rate, or Libor, remains above 2 percent. In a normal environment, that spread is well below 1 percent.

Corporate bond rates are also easing a bit, too, but not as much as Treasurys have, said Howard Simons, strategist with Bianco Research in Chicago.

One big worry stifling activity in the markets is that if the government is doing so much lending and backstopping now, it's going to need to do a lot of borrowing, too, to finance those efforts. And if the government is seeking lenders to buy its debt, what is going to happen to other borrowers looking for lenders?

As the Federal Reserve and Treasury act to rescue borrowers, Simons said, "they're starving other private sector borrowers."

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