Market Insider: US Gets Money for Nothing

The stock market's Santa rally has been temporarily grounded as a winter chill continues to swirl around credit markets.

Stock traders have been warily watching this week's auctions for T-bills, the shortest duration Treasury securities, and have been shocked at the appetite of investors for four-week bills yielding zero, and little more for three-month bills.

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These bills are used for cash management and have been in high demand as investors of all types rushed to cash. The Treasury Tuesday sold $32 billion in 4-week bills at an unprecedented yield of zero, and, in fact, bills traded in the secondary market with a negative yield.

"It's a sign of panicky fear. I'll pay you to hold my money," said UBS director of floor operations Art Cashin.

Michael Franzese, head of government bond trading at Standard Chartered, said the activity in T-bills is all about capital preservation by big funds and institutions. "They want to make sure going across year end that they have actual money. They don't want to take any counterparty risk. If you're a corporation with large sums of money, you want to make sure you're more safe than sorry," he said.

"Mutual funds, corporations, money managers. Everybody's using the bills as a stop gap. There are also individuals," he said.

In Tuesday's market, the Dow tumbled 242, or 2.7 percent to 8691, the third down day in 12 sessions. The S&P 500 fell 21 to 888, a decline of 2.3 percent. Stocks had gained more than 6 percent in the previous two sessions.

"Santa is looking for a repair shop about now," said Cashin. "... People are going to say, 'See I told you this was a two-day rally.'" Cashin said the market reacted to the sputtering progress of the auto bailout plan in Washington, as well as concern about the arrest of Illinois Gov. Rod Blagojevich, who was accused of using pay-to-play tactics to fill President-elect Barack Obama's senate seat.

Cashin said there was some anxiety among investors as the news story unfolded that the situation would slow the presidential transition if any of Obama's supporters were somehow linked with the governor. Obama said he had no contact with the governor or his office and was unaware of what was happening.

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The 10-year Treasury added 19/32 points to 109-12/32, lowering its yield to 2.669 percent, while the two-year's yield slid to 0.858 percent. The Treasury will sell $28 billion in three-year notes on Wednesday and $16 billion in 10-year notes Thursday.

Franzese said the bond market remained nervous Tuesday after comments made Monday by the Comptroller of the Currency John Dugan that mortgage modifications just forestall problems and that many borrowers find themselves back in default.

The dollar Tuesday slid 0.92 percent vs the yen and 0.09 percent against the euro Tuesday. It was a t a level of $1.2929 against the euro and the yen was at 92.12 per dollar.

On Wednesday, wholesale trade is reported at 10 a.m. Weekly oil and gasoline inventory data is released at 10:35 a.m. On Tuesday, oil finished down $1.64 per barrel or 3.75 percent to $42.07.

In other events of interest, Rep. Barney Frank and the House Financial Services Committee will host Treasury's Neel Kashkari and others for a hearing to discuss the Government Accountability Office's report into the Treasury implementation of the Troubled Asset Relief Program. The Wall Street Journal reports that the panel set up to oversee the $700 billion financial rescue plan is expected to release a highly critical report on the TARP in conjunction with the hearing.

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