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Treasury could buy Fanniew Mae and Freddie Mac

Treasuries gained as stocks fell, led by financial companies, highlighting rising concern that problems for the U.S. banking system may be worsening. U.S. stocks fell, sending financial shares to their lowest level since October 1998, on heightened concern that bank failures will spread. Washington Mutual Inc. posted its biggest drop ever and National City Corp. tumbled to a 24-year low after last week's collapse of IndyMac Bancorp Inc. spurred speculation that more regional banks may be short of capital.

Treasuries initially declined, pushing the yield on the 10- year note to the highest in almost two weeks, after Treasury Secretary Henry Paulson put a plan before Congress to provide support to Fannie and Freddie, the government-sponsored enterprises that purchase or finance almost half of the $12 trillion of U.S. mortgages.

There are some that feel that the U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an unmitigated disaster and the largest U.S. mortgage lenders are basically insolvent. Some bet that Fannie Mae shares will keep tumbling. Fannie Mae's market value is now about $10 billion, down from $38.9 billion at the end of 2007. Freddie Mac's market value has shrunk to about $5 billion from $22 billion at the end of last year.

How do you spell Recession?

Treasury two-year notes headed for the biggest five-day gain in three weeks after the Federal Reserve signaled it won't raise interest rates in coming months and the central bank's preferred inflation measure rose less than economists forecast.

Traders pushed two-year note yields to the lowest level in almost three weeks after U.S. consumer confidence fell to a 28- year low. Demand for the safety of government debt also rose as financial news network CNBC reported Merrill Lynch & Co. may post a second-quarter loss and write down the value of mortgage- related assets by as much as $5 billion, citing unidentified people.

Treasuries are still headed for their biggest quarterly loss in four years because of speculation in past weeks that rising energy prices would prompt the Fed to boost interest rates.
With the economy in a slump, and with prices rising rapidly, the Fed has found itself in a dilemma. Short-term rates already are low, and if the central bank cuts them more to stimulate economic growth, then prices could rise even faster and get out of control. If the Fed raises short-term rates, the result could be a recession (or a deeper recession, if the economy already is in one) and a delayed recovery. The economy cannot handle interest-rate increases. On the other hand, inflation pressure is going up. They're stuck between inflation and recession.