Interbank rates still high after rate cut

NEW YORK --The Federal Reserve's interest rate cut failed to pull down bank-to-bank lending rates Thursday, and the amount of commercial paper in the market fell for the fourth straight week.

Both developments were signs that the credit markets - where companies and investors go to borrow and lend - are still operating abnormally in the wake of Lehman Brothers Holdings Inc.'s bankruptcy and other financial company downfalls.

The London Interbank Offered Rate, or LIBOR, for three-month dollar loans rose to 4.75 percent from 4.52 percent on Wednesday.

LIBOR for overnight dollar loans slipped to 5.09 percent from 5.38 percent, but still remains extremely high - especially compared to the target Fed funds rate, a key overnight lending rate that the Federal Reserve slashed Wednesday by a half-point to 1.5 percent.

Just a month ago, three-month LIBOR was at 2.81 percent, while overnight LIBOR was at 2.15 percent. The sharp jump over the past month is worrisome because consumer loans such as adjustable-rate mortgages are tied to LIBOR - meaning that those mortgages could become harder to pay.

Meanwhile, the Federal Reserve said the amount of commercial paper in the market dropped for the fourth straight week. Commercial paper is a type of unsecured debt that companies sell to get short-term cash, often so that they can maintain their inventories and payrolls.

Commercial paper outstanding fell by $56.4 billion to a seasonally-adjusted $1.55 trillion in the week ended Oct. 8, the Fed said.

There were some promising signs, however, that the strangehold on the credit markets is starting to loosen.

One was that the recent dro‌p in commercial paper was smaller than the $94.9 billion decline in the previous week, and the $61 billion decrease in the week ended Sept. 24. And last week's decline occurred in financial companies' commercial paper and asset-backed commercial paper - commercial paper issued by non-financial companies edged higher overall.

Moreover, following the Fed's Tuesday decision to buy commercial paper and Wednesday's move to slash the key interest rate, the rates on certain overnight commercial paper fell by 1.15 percentage points on Thursday to 2.35 percent, noted Miller Tabak & Co. analyst Tony Crescenzi.

The yield on the three-month Treasury bill edged up to 0.77 percent from 0.63 percent late Tuesday. That suggests a slight let-up in demand for T-bills, regarded by investors as the safest assets around.

Longer-term Treasury yields also rose, while the Dow Jones industrial average wavered in morning trading.

The 2-year Treasury note fell 8/32 to 100 19/32 and yielded 1.69 percent, up from 1.56 percent late Wednesday. The 10-year note fell 31/32 to 101 27/32 and yielded 3.77 percent, up from 3.65 percent. The 30-year bond fell 1 13/32 to 107 11/32 and yielded 4.06 percent, up from 4.05 percent.