Investors still harbor credit worries

NEW YORK -- The initial euphoria in financial markets after Friday's Federal Reserve discount rate cut faded Monday, and questions began to be asked about what more needed to be done to improve confidence in lending.

On Friday the Fed cut the rate at which it lends directly to banks, and it encouraged lenders to use its discount window in an attempt to restore confidence in credit markets, which are concerned about the extent of losses in the U.S. subprime mortgage market.

Global stock indexes rose modestly Monday in a relief rally, but investors looking for safety continued to buy short-term Treasury debt, with the 3-month yield seeing its biggest daily fall since the stock market crash of October 1987.

The broader credit market seemed far from normal Monday, particularly in the housing sector, where prices are falling and defaults on mortgages are rising. To meet funding obligations, Thornburg Mortgage Inc. said Monday it has sold $20.5 billion of assets and reduced short-term borrowings by an equivalent amount.

"Things have stabilized from last week but the worst isn't over yet," said Michael Pond, Treasury strategist at Barclays Capital in New York.

Countrywide Financial Corp., the nation's largest mortgage lender, ran newspaper adds Monday seeking to reassure customers the problems dogging its mortgage operations were not affecting its banking unit.

The assurance came amid a report that Countrywide has started laying off an undisclosed number of employees. Countrywide spokesman Daniel Weidman did not immediately respond.

Meanwhile, the Conference Board on Monday said its index of leading economic indicators rose 0.4 percent in July, as analysts were expecting. The index fell 0.3 percent in June, after rising 0.2 percent in May. The index has bounced up and down over the past few months, suggesting economic growth is likely to continue but at a slower pace.