T-bill demand still high over bailout uncertainty

The credit markets were tense and investors stuck to the safety of Treasurys Tuesday as Wall Street waited for Washington to solidify its bank bailout plans.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before Congress, urging them to quickly pass the $700 billion financial bailout that they orchestrated over the weekend.

"All investors, especially the professional ones, are jittery about the issue of congressional passage," said Kevin Giddis, managing director of fixed income at Morgan Keegan. "The market's tenuous; it's very fragile right now. If they get wind that this is becoming a political event, we will see a complete disruption again."

The yield on the 3-month Treasury bill was at 0.92 percent early Tuesday, up slightly from 0.88 percent late Monday. A month ago, the yield on the 3-month T-bill was 1.69 percent; it tumbled briefly below zero at the height of the market's frenzy last week for the first time since 1940.

"There's still a really heavy presence of safe-haven demand keeping yields at nearly historic lows," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC. "It's just a real fearful atmosphere."

The credit markets are operating better than they were last week, but remain tight.

The London Interbank Offer Rate, an important bank-to-bank lending rate known as LIBOR, was little changed from Monday and well below last week's peak above 6 percent. However, at just below 3 percent now, it is still much higher than the Fed's target fed funds rate, another interbank lending rate, of 2 percent. That shows banks are still largely keeping their cash to themselves.

In other Treasury trading Tuesday, the benchmark 10-year Treasury note rose 14/32 to 101 22/32, and its yield was at 3.79 percent, down from 3.85 percent late Monday.

The 30-year Treasury bond rose 15/32 to 101 26/32, and its yield fell to 4.39 percent from 4.42 percent late Monday.

The 2-year Treasury note rose 7/32 to 100 20/32 and yielded 2.05 percent, down from 2.17 percent late Monday.

The Treasury plans to sell $34 billion in 2-year notes on Wednesday and $24 billion in 5-year notes on Thursday. Investors will be closely watching to see how strong demand is for those issues, particularly among foreign buyers.