U.S. two-year Treasuries headed for a fifth week of gains and German notes of the same maturity posted their biggest weekly advance since the September 2001 terrorist attacks. Japanese 10-year bonds rallied for a second day.
``Clearly the focus is on the vacillations of U.S. Congress,'' said John Stopford, who oversees about $12 billion in assets as the London-based head of fixed-income at Investec Asset Management. ``We've taken a defensive position in the short term. We and others are increasingly accumulating a large pool of overnight deposits.''
Investors are piling in to the safest assets on concern delays to the bailout plan will cause more banks to fail. At the same time, the short-term debt markets that provide financing for the global economy are seizing up. The Libor-OIS spread, a measure of the availability of cash among banks, widened for a fifth day to near a record today.
U.S. lawmakers were meeting again today in Washington after some House Republicans, led by Virginia's Eric Cantor, said they wouldn't back a plan based on Treasury Secretary Henry Paulson's approach. The stalemate came after an unprecedented meeting of the two presidential candidates, President George W. Bush, congressional leaders and Cabinet officers.
`Changed Perception'
``What has changed is the market's perception of the bail- out package and whether or not it proceeds in its original form,'' said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd., the country's largest bank. ``The market has come to focus on the underlying problems, rather than the short-term solution.''
The yield on the two-year U.S. Treasury note fell 15 basis points to 2.02 percent as of 12:30 p.m. in New York, taking its decline in the past five weeks to 38 basis points. Two-year German yields dropped 18 basis points to 3.66 percent and Japanese 10-year yields lost 2 basis points.
``It's gloomy because the bailout package was seen as the cavalry coming over the hill,'' said Richard McGuire, a senior fixed-income strategist at RBC Capital Markets in London. ``The safe-haven bid for fixed income has returned.''
Central banks have so far failed to unlock the credit markets and get banks to lend to each other again. The European Central Bank lent banks $35 billion for seven days today. The Bank of England loaned $30 billion of one-week cash as well as $10 billion overnight.
Balking at Lending
Financial institutions are balking at lending to each other because they are concerned counterparties may hold tainted assets at a time when demands on their own cash are rising. The yield on bonds sold by Morgan Stanley maturing in three months' time was almost 37 percent today, up from 4.07 percent two weeks ago.
Few strategists and analysts predicted the gains in government bonds of the past two weeks. The two-year U.S. note today yielded 14 basis points less than 2.16 percent median forecast of 31 analysts in a Bloomberg survey for the end of the third quarter. The forecast was 2.60 percent in August.
The London interbank offered rate, or Libor, that banks charge each other for three-month loans stayed near the highest level since January today, the British Bankers' Association said. The euro rate, or Euribor, for such loans rose to the highest level since the single currency was introduced in 1999, according to the European Banking Federation.
China Curbs
The Libor-OIS spread, which compares the cost of borrowing in dollars over three months with the overnight indexed swap rate, widened 13 basis points to 208 basis points, after exceeding 200 basis points for the first time yesterday.
Concern about more failures among financial institutions prompted domestic Chinese banks to cut trading with foreign firms in the interbank market, according to Zhuang Zhiqiang, a trader at Xiamen International Bank Co., which is partly owned by the Asian Development Bank. The move aims to control risks after the bankruptcy of Lehman Brothers Holdings Inc., said Zhao Qingming, an analyst in Beijing at China Construction Bank Corp., the nation's second-largest lender.
Washington Mutual became the U.S. biggest bank failure in history yesterday after being seized by regulators and sold to JPMorgan Chase & Co. following $16.7 billion of customer withdrawals since Sept. 16. Financial institutions worldwide posted $522 billion of losses and writedowns tied to U.S. subprime mortgages since the start of 2007.
Stock Declines
Stocks and other higher-risk assets fell as investors shunned all but the safest government debt. Europe's Dow Jones Stoxx 600 Index decreased 1.9 percent, extending its drop this week to 4.4 percent, and the Standard & Poor's 500 Index slid 1.4 percent.
Waning demand for emerging-market assets widened the difference in yield, or spread, between U.S. Treasuries and the bonds of nations from Brazil to Ukraine by 10 basis points to 377 basis points, according to a JPMorgan Chase & Co. index.
Fortis, the Brussels and Amsterdam-based financial-services company, said the bank's financial position is ``solid,'' seeking to stem a sell-off that's driven the stock down 35 percent this week. Fortis has come under pressure because of speculation the company will struggle to raise the 8.3 billion euros ($12.2 billion) it needs to bolster capital, and may even need more as financial markets deteriorate.
Favoring T-Bills
The U.S. commercial paper market slumped $61 billion, or 3.5 percent, to a seasonally adjusted $1.7 trillion in the week ended Sept. 24, the Federal Reserve said yesterday, a further sign of investor reluctance to take on higher-risk assets.
``Investors are clearly shunning financial market commercial paper in favor of T-bills,'' said Jane Caron, chief economic strategist at Dwight Asset Management Co. in Burlington, Vermont. ``Hopefully the stress level doesn't increase significantly from here.''
Three-month U.S. Treasury bill yields fell to 0.36 percent on Sept. 24 as demand for the shortest-dated government debt surged. The rate, which declined to 0.02 percent last week, the lowest since World War II, was at 0.85 percent today.
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 11 basis points to 291 basis points. It was as much as 337 basis points yesterday, the most since Bloomberg began compiling the data in 1984. From 2000 to 2007, before the credit crisis began, the spread averaged 31 basis points.
