Analysts Speculate Possible Rate Cut In The Making As Treasury Yields Fall

Source : All Headline News (AHN)
Date : Wednesday, August 21, 2007
Writer : AHN / Jacob Cherian

Washington, DC (AHN) - Treasury prices continued to climb Tuesday, pushing yields lower. The benchmark 10-year note was up, yielding 4.59 percent.

The rise in bond prices comes ahead of a key meeting between Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Senate Banking Committee Chairman Chris Dodd.

Some analysts are speculating that a possible rate cut by the Fed is in the making, since credit markets were still nervous Monday, despite a cut in the discount window rate.

As of 11:54 am EDT, the Dow Jones industrial average was up 0.21 percent, the NASDAQ composite index up 0.39 percent, and the S and P 500 index gained 0.42 percent.

"Friday's discount rate cut by the [Fed] helped bring a little order to the Fed funds market but the slump in US Treasury bill yields signal that risk aversion amongst short-end investors is still intense," said Rob Minikin, an analyst at Lombard Research in London, reports CBS MarketWatch.

Treasury Secretary Henry Paulson said in an interview with CNBC, "We are going to work through this problem just fine," in an attempt to calm jittery investors on Tuesday.

Paulson stressed that the U.S. economy remains is fundamentally sound and that it should be able to withstand the turmoil in the markets.

Meanwhile, Goldman Sachs injected $2 billion into one of its hedge funds last week, signaling the contagion of credit problems beyond home mortgages to those with bad credit histories to other borrowers.

On Tuesday, in desperate efforts to quell the strain on markets, the Federal Reserve added another $3.75 billion into money markets in the latest of several cash transfusions totaling over $100 billion.

According to a report by Bloomberg, the Fed will not know if the August 17th cut in discount rates will have a calming effect on markets for several days. Fed officials say they expect some turbulence since banks are cautious about the collateral involved.

"What the Fed wants to do is buy time to sort these things out,'' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Fed Chief Bernanke is trying to avoid a rate cut to the lending rate between banks, and aiming to stabilize liquidity in markets, say analysts.

The Fed doesn't want to bail anybody out,'' said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, reports Bloomberg News. "If they can get through the next couple of weeks, maybe cooler heads will prevail.''