Dec. 12 (Bloomberg) -- The lowest yields on Treasuries are providing no solace to U.S. companies paying the highest borrowing costs on record.

While rates on everything from four-week Treasury bills to 30-year bonds fall to all-time lows, companies are paying an average 10.8 percent on their debt, up from 6.53 percent in January, according to Merrill Lynch & Co.’s U.S. Corporate & High Yield Master Index. The premium investors demand for lending to companies instead of the government rose to 8.85 percentage points yesterday, compared with 2.96 percentage points at the start of the year, the index shows.

“The only place where there is liquidity is Treasuries,” said Mirko Mikelic, a senior money manager at Grand Rapids, Michigan-based Fifth Third Asset Management, which oversees about $22 billion in assets.

The $8.5 trillion committed by the U.S. to rescue the financial system hasn’t succeeded in unlocking credit markets that seized up with the collapse of the subprime mortgage market in August 2007. AT&T Inc., the largest U.S. telephone company and a benchmark borrower in the corporate bond market, sold $1.5 billion of 6.7 percent notes last month that yielded 4.38 percentage points more than Treasuries, compared with 1.68 percentage points in an offering a year ago.

Flight to Quality

“The government would give up yield to unfreeze credit markets” if it would help, Mikelic said. “But right now there’s a tremendous flight to quality that’s going on. A lot of people globally are concerned still about the viability of the financial system.”

Oklahoma Gas & Electric Co., the state’s largest electrical utility, this week agreed to pay a coupon of 8.25 percent and a spread of 5.49 percentage points to raise $250 million in a sale of 10-year notes, compared with 6.35 percent and 2.75 percentage points just three months ago, according to data compiled by Bloomberg. Monongahela Power Co. issued five-year first-mortgage notes with a spread more than six times what the Fairmont, West Virginia-based utility paid two years ago for 10-year bonds.

Investors are willingly accepting negative yields for the first time to own Treasuries even as the U.S. commits more than half the value of the nation’s gross domestic product to halt the worst recession since the Great Depression. The government sold $27 billion of three-month bills this week at a discount rate of 0.005 percent, the lowest level since the auctions began in 1929.

Jumpstart Lending

The government invested or loaned financial institutions $3.2 trillion to stem the financial crisis and jumpstart lending. The Federal Reserve pledged to buy as much as $2.4 trillion in short-term corporate debt, and the Federal Deposit Insurance Corp. will guarantee as much as $1.4 trillion of interbank loans. The Fed will spend as much as $800 billion to purchase debt issued or backed by government-charted mortgage-finance companies and to support consumer and small-business loan markets.

“The government’s doing what it can to keep the patient alive,” said Alan Schlesinger, owner of Alchemy Management LLC in Great Neck, New York, and the former head of high yield at Zurich-based UBS AG. “I don’t think anyone is prepared to put money at risk.”

Investment-grade companies with short-term ratings one or two steps lower than the highest level are paying an extra 4.87 percentage points to sell 30-day commercial paper not supported by the Fed, according to data compiled by Bloomberg.

Whirlpool

The gap was 0.78 percentage point as recently as August. Companies are dropping their commercial-paper programs in favor of pre-established bank credits and cutting sales of the short- term IOUs by half from five months ago, Fed data show.

Benton Harbor, Michigan-based Whirlpool Corp., American Electric Power Co. of Columbus, Ohio, and AGL Resources Inc. in Atlanta tapped emergency bank lines of credit rather than pay twice as much on commercial paper.

Yield spreads on investment-grade corporate bonds surged to a record 6.56 percentage points on Dec. 5, according to Merrill Lynch index data. The difference on high-yield, or junk, bonds reached a record 20.9 percentage points yesterday. Junk bonds are rated below Baa3 by Moody’s Investors Service and BBB- at Standard & Poor’s.

El Paso Corp., the Houston-based owner of the largest U.S. network of natural-gas pipelines, raised $500 million on Dec. 9 by offering a yield of 15.25 percent to sell notes rated three steps below investment grade, data compiled by Bloomberg show. That’s twice as much as El Paso paid just six months ago to raise $600 million from a sale of 10-year securities.

Atlanta-based Cox Communications Inc., the third-largest U.S. cable company, sold $600 million of 10-year investment-grade debt the previous day at a yield of 9.5 percent and a spread of 6.75 percent. In May, Cox paid a spread of 2.2 percentage points to sell $750 million of 10-year 6.25 percent notes.

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: December 12, 2008 10:55 EST