High yield is a nice way of saying "junk" when talking about bonds. These bonds are issued by firms who must pay a higher interest rate when raising capital than those companies that issue bonds that qualify as investment grade. Those higher interest rates are attractive to investors and lately demand for high yield bonds has led to a very nice rally in junk bond funds like the iShares High Yield Corporate Bond Fund (HYG).

Today, HYG is finally pausing in its uptrend as investors take some profits off the table across the bond market. Investors are concerned about the fact that the Treasury plans to flood the $112 billion worth of new debt into the market next week. That will be a record auction amount and could put temporary downward pressure on bond prices.

How'd you like to borrow money for 30 years at 2.95%?

The U.S. government can, and it's making it easier for the federal government to fund its increasing budget deficit, as well as help build the case for a large fiscal stimulus package.

Treasury prices continued to rise Tuesday, pushing the yield on the 30-year government bond down to 2.95% -- close to its lowest level since regular sales began in 1977. The 10-year note yielded 2.48%; the 5-year note, 1.47%.

Further, while it may seem like a contradiction to have long-term interest rates fall at a time the U.S. government is on-track to record at least a record $600 billion (and probably much higher) budget deficit this fiscal year, there's a method to institutional investors' madness, so says economist Richard Felson.

"The landscape for private investment is poor. We have a recession on all continents, and there's a lack of places to deploy capital productively. That dearth of opportunities for return on investment plus fear of losses from toxic assets is driving investors to the safer investments, and one of the safest is the U.S. Treasury," Felson said. "It's the preferred place to be until the major economies start to recover."

More progress on the credit market front.

The initiative by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction early Monday -- down -- as rates fell to their lowest level since the failure of Lehman Brothers on September 15.

The London rate for three-month loans in dollars declined for the 16th consecutive day, dropping another 17 basis points to 2.86%. The three-month rate for the euro, the Euribor, also fell 3 basis points to 4.74%. Rates also fell in Asia.

Meanwhile, the London interbank overnight rate, or LIBOR, decreased 2 basis points to 0.39%. In addition, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, fell to 224 basis points, which is down from 364 basis points on October 10.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Short-term interest rates continue their downward trek.

The effort by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction Thursday -- down -- as private banks were encouraged by the U.S. Federal Reserve's interest rate cut and $120 billion in new swap lines with emerging market central banks.

The London rate for three-month loans in dollars declined for the 14th consecutive day, dropping another 23 basis points to 3.19%. Rates also fell in Asia: the three-month rate for Hong Kong, the HIBOR, dropped 15 basis points to 3.39%.

Meanwhile, the London interbank overnight rate, or LIBOR, plunged another 41 basis points to 0.73% - - its lowest level since January 2001.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

The thaw in short-term interest rates continues.

The effort by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction Wednesday -- down -- as private banks were encouraged by commercial paper purchases by the U.S. Federal Reserve and a likely interest rate cut later today.

The London rate for three-month loans in dollars declined for the 13th consecutive day, dropping 5 basis points to 3.42%. The three-month rate for the euro, the Euribor, also fell 2 basis points to 4.83%, and the three-month rate for Hong Kong dollars, the Hibor, dropped 30 basis points to 3.54%.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

The meltdown in short-term interest rates continues unabated.

The effort by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction Wednesday -- down. The London interbank overnight rate, or LIBOR, fell another 16 basis points to 1.12% -- its lowest level since June 2004. The London rate for three-month loans in dollars declined for an eighth consecutive day, dropping 29 basis points to 3.54%.

In addition, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, fell to 248 -- down from 434 basis points a week ago.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

The U.S. Federal Reserve announced Tuesday an expansion of its securities lending program.

The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.

The Fed added that "since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again." The Fed added that central banks "will all continue to work together and will take appropriate steps to address those liquidity pressures."

"To that end," the Fed said, "today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are also announcing specific measures."

Fed Analysis: Without question, the Fed is attempting to head-off any building, short-term liquidity crunch banks may face in the weeks and months ahead. This latest increase in the Term Auction Facility, the coordination with the other major central banks indicates monetary, and lengthening of the primary dealers' term to 28 days from overnight will help the Fed and the other central banks achieve that liquidity goal.

U.S. home foreclosures reached another record high in Q4 2007, the Mortgage Bankers Association announced.

A record 0.83% of mortgages were entering the foreclosure process in the last three months of 2007, compared to 0.54% for the same period in 2006, the MBA announced.

In addition, the delinquency rate reached 5.82% in Q4 2007 -- the highest level since 1985 -- up from 4.95% in Q4 2006.

After all of the talk of splitting itself into two pieces, a "bad" part and a "good" part, Ambac (NYSE: ABK) will probably operate as only one company. The theory had been that the healthy muni-bond insurance operation should be separated from the business that insured more risky derivative instruments.

Breaking the company in half always had a number of complications, the worst of which is what would happen to common shareholders? Would they get shares in the "good" part of the business? Perhaps, but outside firms putting in money might want to keep that for themselves. Shares in the "bad" part of the business would probably be worthless.

Another issue is the legal troubles a split might cause. According to the FT, this raised the "possibility of lawsuits by banks and other groups that bought insurance on CDOs and other structured products."

Ambak is almost certainly going to have to live with its two businesses under that same roof. If the structured finance business continues to fall apart, the real question is how much more money will the insurance company have to raise.

Douglas A. McIntyre is an editor at 27wallst.com.

The compelling question, following the U.S. Federal Reserve's 125-basis-point cut in short-term interest rates in 8 days, is whether the Fed has done enough.

"Probably not," economist David H. Wang told BloggingStocks Thursday. "But they've done all they can do, politically and practically, until the next meeting in five or so weeks."

By practically, Wang means that barring another market plunge or a capitulation day, the Fed is not prepared to lower rates before its next meeting. The Fed is already facing criticism that it responded earlier not to economic conditions, but to Wall Street's demands -- perpetual demands in the view of some -- for interest rate cuts. In this climate it would take an extraordinary event to secure another Fed emergency cut, he said.

By politically, Wang means the Fed is, similarly, facing criticism that its current easing policy will increase inflation pressure. "Some in Washington believe in inflation will accelerate so much that by year's end the Fed may be forced to raise rates. And I grant you, it's not a baseless concern," Wang said.

The selling in Europe continued before the markets staged a mild rebound -- which analysts attributed to short-covering and/or the U.S. Federal Reserve's action Tuesday morning to slash both the Federal Funds rate by 75 basis points to 3.50% and the Discount Rate by 75 basis points to 4.00%.

"The Fed's intervention...true, won't necessarily stop the selling that people are doing for fundamental reasons, but it will help calm the markets and reduce people's urge to sell because they fear the markets will freeze up....sell for fear reasons," London-based economist Mark Chandler told BloggingStocks on Tuesday.

There was also talk that the Fed's action will be coordinated with or followed by ensuing actions by the European Central Bank and the Bank of England to ensure the proper function of the markets, Chandler said.

At mid-day Tuesday, Europe's major bourses were down an average of 1% across the board. London's FTSE was down 24.90 points to 5,553.30, France's CAC 40 fell 56.86 points to 4,687.59, and the German DAX fell 147.32 to 6,642.87.

The U.S. Federal Reserve announced that $16.5 billion of its first $20 billion in loans under its term auction facility went to institutions in the New York district [subscription required], an area that includes the headquarters of some of the nation's largest banks, The Wall Street Journal reported on Friday. The Fed doesn't disclose loan sizes or borrowers' identities.

Meanwhile, the Fed's Dallas district reported loans of $1.4 billion, while the St. Louis district reported loans of $1 billion.

Earlier this fall, the Fed established the term auction facility as an alternative short-term loan operation because banks were reluctant to access the Fed's traditional short-term window, the discount window. Banks became reluctant to borrow from the discount window because of the stigma attached: doing so can telegraph distress to other banks.

Fed Analysis: So far, the Fed's effort, along with the effort of the European Central Bank and other major central banks, to provide short-term loans to banks appears to be working. Both overnight and two-week liquidity has improved, as measured by yield spreads and transaction conditions. A later announcement by the Fed to maintain the term auction facility "for as long as necessary" further calmed the markets. Still, investors/readers should keep in mind that the housing correction / credit quality issue is young: given the plethora of at-risk subprime loans and related assets, more default declarations are undoubtedly ahead in 2008.

The market is assuming that the Federal Reserve will cut rates by one-quarter of a percent tomorrow. Some experts, like bond guru Bill Gross, think that the cut should be deeper.

But there is some indication that the Fed may not cut at all. The Wall Street Journal argues that "for policy makers, the decision is between the quarter-point reduction and no cut at all."

If there is no cut, the market will almost certainly take it badly, even if the Fed indicates that it may move rates down later in the year. Most investors and Wall Street experts believe that lower rates could help the mortgage business and stimulate sales of goods and services such as cars.

But the Fed appears to have some ongoing concerns about stimulating the market into a period of inflation. U.S. GDP is still moving up at a crisp pace. Unemployment is low. The stock markets are near multi-year highs.

No cut by the Fed could push the stock market down for a few days, but reasonable third-quarter earnings and a solid economy are likely to mitigate that over the near-term.

Douglas A. McIntyre is an editor at 247wallst.com

Another day, another huge decline in the Dow Jones Industrial Average.

Stocks tumbled yet again today as widespread panic over subprime mortgages, worries over retail sales and general unease about the future caused investors to shift their money into safe havens such as mattresses, refrigerators and crawlspaces in their homes. Pleas for calm by pundits such as Citigroup Inc. (NYSE:C) strategist Tobias Levkovich, who today urged investors "not to succumb to an emotional desire to sell before things get worse" were ignored.

What's remarkable about this more than 100 point sell-off is that it came after the Fed pumped $24 billion in temporary funds into the economy. Central banks in Japan, Europe and Australia also responded to the crisis, according to Bloomberg News.

Still, the market isn't stable and bad signs abound.

Countrywide Financial Corp. (NYSE: CFC) scared the bejesus out of the market yesterday with its warning of "unprecedented disruptions." France's BNP Paribas froze three investment funds that until fairly recently were worth about $2.2 billion because of losses in the U.S. mortgage market and apartment builder Tarragon Corp (NASDAQ: TARR) raised doubts about its ability to continue in business, according to the Wall Street Journal.

About the only good news came from the Fed's declaration this morning that it would provide liquidity "as necessary" to bolster the market.

Smart investors know that it's always darkest before the dawn, but that doesn't make times any less dark.

Stock and bond market volatility has picked up the past few weeks as the yield on the ten-year bond increased from 4.6% to 5.14%, a big increase in what has been a mundane long-end of the curve for quite some time.

Pretty much following the bursting of the tech-telecom bubble and 9/11, the bond market has been stuck in a very tight trading range. Investors developed a Pavlovian response running into bonds on any bad financial news or events surrounding oil or terrorism. However, it appears that this might be about to change. The 10-year bond is oversold and due for a considerable rally, but after a bond market rally, look for a behavioral shift to equities to begin.

The returns for equities will be too promising to pass up and greed will win out over fear. Do not read too much into the recent selloff in bonds. Too much of the asset-allocation pie was directed into bonds, it is time for it to shift back into equities.