Credit still crunched; Treasurys bounce

Credit markets were still choked Wednesday - and as investors waited to see whether the Senate would pass a $700 billion bailout bill, uncertainty gave most Treasurys a boost.

The fiercely debated bailout bill, which the House of Representatives rejected Monday, could work to break the jam that has been hindering the flow of cash between banks and to consumers. With nobody lending cash, the economy is in jeopardy.

The Senate plans to vote on the rescue plan - with new provisions - Wednesday evening.

The bailout plan would allow the government to take severely devalued mortgage assets off the hands of beleaguered financial institutions, freeing them to resume lending activity. However, strong opposition to the plan claimed taxpayers should not be bearing the brunt of Wall Street's blunders.

Market gauges: What little lending is happening is expensive for the borrower. When banks charge each other a higher premium to borrow, that cost trickles down the consumer who might be looking for an auto loan, a mortgage or a school tuition loan.

One indicator of how willing banks were to lend to other banks, called the "TED spread," showed high prices of loans between banks. The TED spread measures the difference between three-month Libor and the 3-month Treasury borrowing rates and is a key indicator of risk. The higher the spread, the bigger the aversion to risk.

On Wednesday, the spread retreated to 3.24%, after surging as high as 3.53% Tuesday, its highest level in more than 25 years, according to Bloomberg.com. On Sept. 5, the TED spread was only 1.04%.

Furthermore, the difference between the 3-month Libor and the Overnight Index Swaps dipped to 2.44%, just lower than a record high 2.46% spread Tuesday, according to data reported by Bloomberg.com.

The Libor-OIS "spread" measures how much cash is available for lending between banks, and is used by banks to determine lending rates. The bigger the spread, the less cash is available for lending.

The Libor, or the London interbank offered rate, is a daily average of what banks charge other banks to lend money in London.

The 3-month Libor rate, at 4.15% Wednesday, has been trending higher for some time as the European economy has been facing credit shortages and bank failures of its own.

The overnight Libor rate dropped sharply to 3.79% Wednesday, according to data reported by Bloomberg.com. It hit an all-time high of 6.88% Tuesday, according to the British Banking Association, which has been keeping records since 1984.

Treasurys: Investors use government bonds as a safe-haven to park their assets. As the next chapter of the bailout saga drags on Wednesday, bond prices rallied.

The benchmark 10-year note rose 15/32 to 10- 29/32 and its yield fell to 3.77% from 3.85% late Tuesday. Bond prices and yields move in opposite directions.

The 30-year bond jumped 1-4/32 to 104-7/32 and its yield fell to 4.25% from 4.36.

The 2-year note edged up 1/32 to 100-3/32 and its yield dipped to 1.96%.

The yield on the 3-month bill rose to 0.90% from 0.85% as prices ticked lower. The 3-month note is a popular asset for money markets looking for stability because it offers a safe place to park cash on a short-term basis.

Wall Street ping-pongs: Stocks have zigzagged in the prior two sessions. On Monday, the Dow Jones industrial average plummeted a record 778 points after the House vote. But, on Tuesday, the Dow ended 485 points higher as rhetoric from Washington convinced investors that sooner or later, the government would pass some version of a rescue plan.

FDIC steps in: With investors jittery and confidence in the banking system breaking down, the Federal Deposit Insurance Corporation announced Tuesday that it would increase the amount that the agency would insure. The FDIC is the agency that insures depositors in case of a bank failure.

Chairwoman Shelia Bair issued a statement asking that Congress allow her agency to increase the $100,000 limit per account, which was set in 1980. "To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits," she said