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Treasurys plunge on Buffett's bond rescue

February 13, 2008 | "Associated Press"

Government bonds take a dive as Warren Buffett offers to absorb the muni liabilities of bond insurers.

Long-term Treasury prices plunged Tuesday after investor Warren Buffett offered to provide extra guarantees on more than $800 billion in municipal bonds backed by troubled insurers MBIA (MBI), Ambac Financial Group (ABK) and FGIC.

The offer seemed to promise more stability to a municipal debt market badly shaken by bond insurers' decisions to guarantee subprime mortgage debt - a move that badly hurt the insurers' finances. Municipal debt prices have been under severe strain since the insurers' problems became known, despite the fact that the majority of local governments have solid records of paying back their debts and these assets normally are considered safe and popular.

In recent months, fears about muni debt, and other higher-risk assets like stocks, fueled many vigorous rallys for Treasurys, which carry Federal government guarantees. Treasurys fell from favor Tuesday as the muni bond market suddenly looked a lot safer. Buffet's offer will not rescue the insurers, but it should help the bonds and the cities and counties that issue them.

Bing: Thanks, Mr. Buffett!

"Buffett is saving bonds that should have been saved by now and he is doing so at distressed prices," said T. J. Marta, fixed income analyst at RBC Capital Markets. "But the cities should like this because a guarantee is positive for them."

The benchmark 10-year Treasury note dropped 18/32 to 98 18/32 with a yield of 3.67 percent, up from 3.62 percent late Monday. Prices and yields move in opposite directions.

The 30-year long bond fell 30/32 to 98 18/32 with a 4.46 percent yield, up from 4.40 percent.

The 2-year note ended unchanged at 100 13/32 with a yield of 1.96 percent, up from 1.91 percent.

The yield on the 3-month note rose to 2.32 percent from 2.27 percent late Monday as the discount rate rose to 2.27 percent from 2.22 percent.

Buffett revealed that one of the three insurers had rejected his offer, but he declined to say which one.

From the insurers' viewpoint, the problem with the Buffett offer is that it does not cover the subprime debt held in the complex assets called collateralized debt obligations that the insurers backed. His offer only extended to the more desirable assets backed by the insurers, the municipal bonds.

Buffett offers to help ailing bond insurers

"I really don't think this does much for anyone but Warren Buffett," said Kevin Giddis, fixed-income strategist at Morgan Keegan. "The thought of an insurer giving away its best business and their only means of surviving this mess in return for the rest of its 'junk in the trunk' should leave them cold."

At the same time, relieving the insurers of the need to back high-quality munis could allow them to conserve their finances and be ready for masses of anticipated claims on bad subprime assets. But many question whether forfeiting their stable line of business in order to concentrate on their ill-advised activities in the subprime sector would be worth even the massive $800 billion capital infusion Buffett has offered.

The Buffett plan was well-received in the stock market Tuesday, which rallied. Those gains also hurt demand for Treasurys.

Still the credit markets have a long way to go before they can reclaim stability. The Federal Reserve Tuesday auctioned another $30 billion in funds to commercial banks in an effort to combat a severe credit squeeze. There are concerns that banks stung by the subprime crisis are hoarding funds in case they have to write down more debt.

The Fed is attempting to increase the amount of money in the financial system to keep the banks lending and prevent a severe credit squeeze from making the current economic slowdown worse.

In aother sign of the government's willingness to come to the aid of troubled credit markets, the Bush administration announced an initiative that would grant 30-day reprieves to some homeowners facing foreclosure on their mortgages.

Dubbed "Project Lifeline," the program will be available to people who have taken out all types of mortgages, not just subprime home loans.

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