Fear Recedes in the Debt Markets

The government's $800 billion plan to bolster mortgages and other consumer loans pushed credit markets to their best day in weeks as yields fell on mortgages and corporate bonds, as well as Treasurys. Persistently high yields and frozen markets have made it difficult and expensive for consumers to borrow to buy homes, cars and to pay for college. The plan, announced Tuesday, goes right to the heart of those issues by buying or lending money to buy securities tied to these loans. View Full Image European Pressphoto Agency SUPPORT SYSTEM: Treasury Secretary Henry Paulson announces the latest lending plan on Tuesday. "To the extent you're trying to help the credit markets I can't think of too many better ways you can do it than a direct injection like this," said Joseph Balestrino, fixed-income market strategist at Federated Investment Management Co. The move in mortgage securities contributed to a rally in prices of 10-year Treasurys, pushing down the yield to 3.094% -- the lowest in at least 31 years. Under the twin plans, the Federal Reserve Bank of New York will create a Term Asset-Backed Securities Loan Facility, or TALF, that will lend as much as $200 billion to holders of certain high-grade securities backed by assets such as student loans, credit-card loans, auto loans and small-business loans. The Treasury will backstop $20 million of that through the $700 billion Troubled Assets Relief Program passed by Congress in September. In addition, the Fed said it would buy as much as $500 billion of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The central bank also will buy $100 billion of the mortgage finance companies' debt securities, including that of the Federal Home Loan Bank, through reverse auctions starting next week. The lending facilities "should theoretically be positive for the markets and help unfreeze the logjam, but it remains to be seen if the government will effectively soak up the supply of debt or whether it will help attract investors back to these markets," says Jon Thompson, vice president of structured finance at Advantus Capital Management in St. Paul, Minn. Paulson Looking to Boost Lending 1:56 Treasury Secretary Hank Paulson announces plans to try and help banks loan money out to people faster. But critics say that "throwing money at the problem" is what spurred the crisis to begin with. Video courtesy of Fox News. (Nov. 25) Over the past year, the gap between yields of triple-A-rated asset-backed securities and Treasury bonds jumped from 2 percentage points to 7.4 percentage points, according to data from Merrill Lynch. Before the credit crunch, that spread was less than half a percentage point and was a key factor that kept borrowing rates on auto loans and subprime mortgages relatively low. By staying high, yields on these securities were making the economic slowdown worse. Normally Treasury yields fall during an economic downturn. That should pull down lending rates. But the yields of these securities remained high because investors were worried about rising loan defaults and demanding higher returns to hold the debt as a result. On Monday, triple-A asset-backed securities yielded 8.7%, versus 5.3% a year ago. Tuesday's Fed announcement brought back mortgage-debt buyers in force. The spread between mortgages and Treasurys fell from 2.09 percentage points to 1.86, the biggest drop since the government put Fannie and Freddie into conservatorship Sept. 8, said Art Frank, director and head of mortgage-backed securities research at Deutsche Bank. Normally, mortgage yields are 1 to 1.5 points over Treasurys. The bond markets got another boost from a different government bailout program that was used for the first time Tuesday. This one allows financial firms to sell debt that is backed by the Federal Deposit Insurance Corp., and Goldman Sachs Group Inc. became the first beneficiary, selling $5 billion of three-year notes that yielded 3.25%, which is roughly half the rate Goldman would have had to pay if it borrowed without the government guarantee. Write to Michael Aneiro at michael.aneiro@dowjones.com