Treasurys advance after massive liquidity injection
by Leslie Wines on Dec. 18, 2007, under EdgeNEW YORK – Treasury prices rose Tuesday, after a massive liquidity injection by the European Central Bank lifted hopes that a global year-end lending crunch can be avoided.
On Tuesday, demand was unexpectedly vigorous to the ECB offer to lend euro-zone commercial banks extra money through the end of the year. The banks borrowed more than $500 billion, much larger than the $160 billion or so expected by many market participants. On Monday the ECB announced it would accept all bids of at least 4.2 percent.
“The pledge of unlimited funds above 4.2 percent was designed to ease money market pressures and secure liquidity over the year end period,” said Action Economics. The news sparked demand for Treasurys and caused a rebound on Wall Street and global stock exchanges.
The fact that European banks were willing to borrow such a large amount soothed anxieties that commercial lenders would refrain from lending and other critical operations in late December. Some investors had worried that banks, which have been hurt by their exposure to below prime mortgage assets, would hoard cash and stay out of the markets altogether as the critical year-end approaches.
The 10-year benchmark Treasury note rose 4/32 to 100 31/32 with a yield of 4.13 percent, down from 4.15 percent late Monday. Prices and yields move in opposite directions.
The 30-year long bond advanced 12/32 to 107 5/32 with a yield of 4.56 percent, down from 4.58 percent.
The 2-year note was unchanged at 99-28/32 with a yield of 3.19 percent, up slightly from 3.18 percent late Monday.
The ECB move caused a decline in many short-term euro-based lending rates, another indication that commercial banks are going to maintain normal operations at year-end. Earlier in the month intra-bank lending rates shot higher as banks kept their cash to themselves.
Results of a special Fed auction for commercial banks on Monday will be announced on Wednesday. The ECB, Federal Reserve and central banks of Canada, the U.K. and Switzerland are making unusual concerted efforts to keep money in the system and commercial banks operating as usual as the end of the year approaches.
A new Commerce Department report showed that the residential real estate sector remains very week. Signs of economic weakness stir demand for safe assets like Treasurys.
Construction of new single-gamily homes in November slowed to its weakest pace in 16 years, the department said. Housing starts for one-family homes dropped 5.4 percent to an annual rate of 829,000, the lowest result since April 1991.
All housing starts dropped 3.7 percent to about 1.19 million last month. That result was near economists’ expectations. The housing starts news follows a Monday report from the National Association of Home Builders that showed builder sentiment hovering at a record low for the third straight month.
