August 22, 2007 (LPAC)--A move by the New York Federal Reserve Bank on Aug. 21 to try to revive the seized-up markets which deal in short-term commercial loans, triggered a near-freeze of the market for 30-day U.S. Treasury bills themselves on Aug. 22, showing that the international credit-market crisis is now whipsawing even the rates on U.S. sovereign debt.

After the Treasury nearly failed to sell the $32 billion in 30-day bills it was auctioning, the interest rate on these bills zoomed up to 4.75%, more than two percent higher than 30-day bills already in circulation. Only the day before, Aug. 21, rates on the same bills had {fallen} by a full percent in one day, an unprecedented volatility in the market for U.S. Treasuries. "The auction was quite shocking. I've never seen that happen in the bill market before," the Wall Street Journal quoted Dresdner Kleinwort bank's chief of Treasury trading. Other analysts called the trading "extreme and abnormal."

These short-term Treasury bills are normally used as collateral for banks and funds investing in 30-day asset-backed commercial loans to private companies, but this whole $3 trillion market has broken down in the past two weeks, and the same banks and funds have been massively buying the Treasury bills themselves, instead. Interest rates on this short-term commercial paper had gone up from below 5%, to 6% in less than a week. The New York Fed was trying to force liquidity into that stricken market, and got a massive backlash against the Treasury bills, showing the super-volatility of financial markets on the edge of panic.