Credit markets squeeze tighter as House vote looms

The stranglehold on the credit markets tightened Friday, as investors awaiting the House's passage of a revised $700 billion financial bailout grew less optimistic about the plan's ability to boost the faltering U.S. economy.

Market participants have been regarding the potential rescue plan as a strong medicine for what's ailing the financial system, but not a cure-all.

When the Fed buys banks' risky assets, it should alleviate investors' worries about the institutions' solvency and free them up to do more lending. But that process will be far from instantaneous, and borrowing could remain very expensive for some time. With the economy in such a weak state, lending to consumers and businesses will still appear risky until certain factors _ particularly employment and the housing market _ improve.

The Labor Department said employers cut payrolls by 159,000 in September, the largest loss in more than five years, while unemployment remained at 6.1 percent.

On Friday, the London Interbank Offered Rate, or LIBOR, for 3-month dollar loans rose to 4.33 percent from 4.21 percent Thursday. That bank-to-bank lending rate has been rising all week, showing that banks are growing less and less willing to lend out their cash for longer than overnight.

LIBOR is tied to many consumer rates like adjustable-rate mortgages.

In one promising sign, overnight lending has gotten significantly cheaper _ LIBOR for overnight dollar loans plunged to a hair below 2 percent on Friday, the lowest rate in nearly four years, from 2.67 percent on Thursday.

That overnight rate is now below the Fed's key bank-to-bank overnight lending rate, known as the target fed funds rate, of 2 percent. It appears that central banks' decision to ramp up their lending to financial institutions over the past couple weeks is having a positive effect.

But that's little solace to borrowers who need a loan for longer than overnight.

Over the past week, the amount of short-term corporate debt known as commercial paper on the market has plunged. And banks and investment firms have borrowed in record amounts from the Federal Reserve's emergency lending facility.

Money market mutual funds, usually the biggest buyers of commercial paper, have run for safety lately after a money market fund "broke the buck" two weeks ago due to its exposure to Lehman. When a fund breaks the buck, it does not have enough assets to cover every dollar invested in it. Instead of commercial paper, they've been investing in Treasury bills.

"There's really no theme except the theme of survival," said John Spinello, bond strategist at Jefferies & Co., referring to the constricted trading in the credit markets Friday.

On Friday, the yield on the 3-month Treasury bill fell to 0.52 percent, down from 0.70 percent late Thursday. There has been no let-up in demand for T-bills, seen as the safest assets around, even though they are offering extremely weak returns.

An upswing in the stock market drew some investors out of longer-term Treasurys Friday, however.

The 2-year note fell 9/32 to 100 15/32, with a yield of 1.76 percent, up from 1.62 percent late Thursday.

The 10-year note fell 19/32 to 102 15/32, and yielded 3.70 percent, down from 3.64 percent.

The 30-year bond fell 4/32 to 105 25/32, and yielded 4.16 percent unchanged from late Thursday.