Credit Squeeze Tightens Grip

Banks like Citigroup and E*Trade(ETFC Quote), in particular, have come under scrutiny recently regarding their ability to maintain capital reserves given their high level of exposure to the subprime mortgage market amid tighter lending standards.

But they are not alone. Many investment banks' attempts to sell over $200 billion in leveraged loans stockpiled from the first half of 2007's M&A boom also have stagnated, as investors still are smarting from falling prices on recent new-debt issues like those of First Data or TXU, say loan and bond market participants. Likewise, high-yield bond market investors say they're reluctant to take on any new risk with the threat of recession and rising defaults looming. As lending costs rise, companies face more difficulty refinancing or paying off debt, much less growing.

Junk-bond risk premiums widened Monday to their broadest level since August 2003, according to KDP Investment Advisors, a high-yield research and advisory firm. Financing deals for the buyout of Alltel(AT Quote) and Chrysler recently faltered in the corporate debt markets.

Worries sent investors seeking the relative safety of Treasury bonds, where yields reached new multiyear lows. The yield on the 10-year Treasury note has dropped to 3.85%, about 17 basis points below Friday's closing yield, and a level not seen since 2004. The 30-year Treasury note yield fell to 4.28%, its lowest since 2003.