NEW YORK (AP) - Government bond prices edged lower Thursday as investors remained anxious about the congested financial system, but hopeful that the government might come up with a solution to get the credit markets functioning again. For the second straight day, investors were mainly focused on the shortest maturities.

Heavy buying of the 3-month Treasury bill - considered one of the safest investments around - sent its yield to just above zero at times during a fractious day across the financial markets.

Some sellers stepped in on a CNBC report that Treasury Secretary Henry Paulson is considering the creation of an entity like the Resolution Trust Corp. to hold the bad debt that has hobbled financial institutions for the past year. But the yield still remained extremely low, at 0.07 percent by late trading.

The RTC was a U.S. government-owned asset manager established in 1989 in response to the savings and loan crisis.

Investors have been pouring money into Treasury bills, frantic to keep funds out of anything that might plunge in value. The flight to T-bills was also a symptom of extreme tightness in other markets that banks and hedge funds use to stash cash for a short period of time - notably, the repo, or repurchase markets, which are temporary loan markets. Because these markets have seized up, the Treasury market is one of the few places available for short-term, fixed-income assets.

On Thursday, news that the world's central banks would inject the global financial markets with as much as $180 billion was only met with modest relief. And T-bill buying picked up when Putnam Investments suddenly closed its $15 billion money-market fund after institutional investors pulled out their cash. Putnam cited ``marketwide liquidity issues,'' and said the fund had no exposure to financial firms Lehman Brothers Holdings Inc., Washington Mutual Inc. or American International Group Inc.

Buying let up later in the day, though, on speculation about the creation of an RTC-like entity. The RTC assumed all of the failed S&Ls' assets, disposed of them over the course of several years, and then dissolved.

``To be honest, it's probably the only solution that's a workable one right now,'' said Tom di Galoma, head of Treasurys trading at Jefferies & Co.

The level of uncertainty in the markets remains higher than it's been in anyone's memory, said John Spinello, a Jefferies bond strategist who has been in the business for 30 years. ``Everyone's very tired, both physically and mentally ... Things change from day to day, hour to hour, minute to minute. It's survival to keep capital, as opposed to increase capital.''

When investors are fearful of taking risks, the economy suffers. Corporate credit spreads - or the difference between the yield on a corporate bond and a government bond - have been approaching levels not seen since after World War II, noted Citigroup economist Steven Wieting in a note Thursday. That means it could be very expensive for companies to borrow money, which is essential to growing and maintaining a business, if the credit markets don't thaw.

By late on Thursday, the 3-month Treasury bill's yield was at 0.07 percent, meaning that after three months, that investment will earn that amount. The yield was up slightly from 0.02 percent late Wednesday, but still down sharply from 1.60 percent just a week ago.

The discount rate on the 3-month T-bill was at 0.08 percent.

In other late Treasury trading, the benchmark 10-year Treasury note fell 28/32 to 103 29/32. Its yield rose to 3.53 percent from 3.42 percent late Wednesday, according to BGCantor Market Data. Yields move in the opposite direction from prices.

The 30-year long bond fell 1 19/32 to 105 13/32, while its yield rose to 4.18 percent from late Wednesday's rate of 4.09 percent.

The 2-year note was unchanged at 101 12/32. Its yield rose to 1.65 percent from 1.64 percent from late Wednesday.

The Dow Jones industrial average rose 410.03, or 3.86 percent, to 11,019.69. It was the biggest one-day point jump since March 18, and the biggest daily percentage gain in six years.

``There's no sense today that everything is done, everything is fine,'' said David Ader, bond strategist at RBS Greenwich Capital in Greenwich, Conn.

On Wednesday, demand for the 3-month Treasury bill had soared so high that the yield briefly dipped into negative territory, which means a bill holder would take a small loss at maturity. To many investors a small loss is preferable to the massive declines seen this week on Wall Street.

According to Los Angeles-based Global Financial Data, the last time the 3-month T-bill was at or below zero was January 1940, in the early stages of World War II.

The rush to T-bills has occurred after a wave of troubling developments on Wall Street: the bankruptcy of investment bank Lehman Brothers Holdings Inc., the absorption of Merrill Lynch & Co. by Bank of America Corp, the $85 billion government bailout of the insurer American International Group Inc., and a money-market fund that had exposure to Lehman and ``broke the buck.''

When a fund ``breaks the buck,'' it means the fund failed to maintain assets of at least $1 for every dollar its clients invested.

Investors are nervously awaiting resolution on other major financial institutions, notably investment bank Morgan Stanley and thrift bank Washington Mutual Inc., which are in talks with potential buyers. Because one company's downfall can trigger problems for another, market participants have limited ways to predict the risk of various companies and assets tied to them. This means there are few people willing to lend.

The upside to lower Treasury rates is that homeowners with adjustable-rate mortgages tied to Treasurys will see their rates come down as well. However, most adjustable-rate mortgages are tied to London Interbank Offered Rate, or LIBOR, a bank-to-bank lending rate set by British banks. And LIBOR remains relatively high.

``People are scared stiff about lending to anybody - especially another bank,'' said David Wyss, chief economist at Standard & Poor's in New York. ``So those accounts are basically frozen.''

09/18/08 18:02 © Copyright The Associated Press. All rights reserved. The information contained In this news report may not be published, broadcast or otherwise distributed without the prior written authority of The Associated Press.