Credit markets still tight as stocks plunge

It might also take another interest rate cut, Rupkey said. The Fed's policymakers aren't scheduled to discuss rates until later this month, but could decide to lower rates in the interim. On Tuesday, Fed Chairman Ben Bernanke is speaking at the National Association for Business Economics' annual meeting.

Lehman Brothers Holdings Inc.'s bankruptcy, along with the government's takeover of Fannie Mae, Freddie Mac, and American International Group Inc., sent fear rippling through the global financial system last month. When a money market fund took a severe hit due to its investments in Lehman debt, investors began flooding out of corporate debt and into Treasurys.

Treasury bill yields remained extremely low on Monday, suggesting that investors such as money market mutual funds are still sticking to the safety of short-term government debt rather than short-term corporate debt known as commercial paper.

The yield on the three-month T-bill was at 0.49 percent, down from 0.50 percent late Friday. The discount rate was also at 0.49 percent.

On Friday, the House passed a revised $700 billion financial rescue plan, after initially rejecting it. The Senate has also approved the bill. But potential lenders remain wary--some banks are still having a hard time staying afloat, and no one knows yet how much the Treasury will pay for the institutions' risky mortgage-backed assets. It will reportedly take four weeks to set up an auction.

"The bailout was supposed to be a confidence booster. It may have been a confidence booster if it had gone through on time," Rupkey said.

Over the weekend, the mortgage crisis spread across Europe. The German government and financial industry agreed to a $68 billion bailout for commercial-property lender Hypo Real Estate Holding AG, while France's BNP Paribas agreed to acquire a 75 percent stake in Fortis's Belgium bank after a government rescue failed. Governments in Germany, Ireland and Greece said they would guarantee bank deposits.

Many financial institutions already saddled with bad debt could take another hit if they sold insurance contracts known as credit default swaps against Fannie Mae and Freddie Mac bond defaults. An auction was held Monday to determine how much the sellers of those contracts will have to pay back buyers, now that the mortgage financiers are under the control of the U.S. government.

According to initial results published by Creditex, debt holders will recover a little over 92 cents on the dollar for Fannie Mae senior and subordinated debt, and nearly 94 cents on the dollar for Freddie Mac senior and subordinated debt.

The final auction results will be available at 4 p.m. Eastern time. A similar auction to determine payouts for Lehman Brothers credit default swaps will be held Friday.