Credit markets still tight after bailout passes, T-bill demand remains high

NEW YORK -- The stranglehold on the credit markets remained tight Friday after the House approved a revised $700 billion financial bailout, with investors still dubious about the plan's ability to boost the faltering U.S. economy.

Treasury bill demand was high, keeping the yield on the 3-month bill at around half a percent.

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

When the Treasury buys banks' risky assets, it should help 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%.

Layoffs are likely to keep piling up if it remains tough to find credit. Spectrum Yarns, a North Carolina textile company, said it closed two plants and laid off 200 workers this week because it got turned down by a North Carolina bank, a New York finance company, and several private lenders.

And it's going to get even harder for individuals to get home loans. Banks have gotten more stringent in their mortgage underwriting, and Wisconsin's affordable-housing agency recently suspended making loans for single-family homes because it was unable to sell tax-exempt mortgage revenue bonds and raise capital.

On Friday, the London Interbank Offered Rate, or LIBOR, for 3-month dollar loans rose to 4.33% from 4.21% 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.