What rate cut? Interbank lending rates keep rising

NEW YORK — Governments around the world have slashed interest rates and ramped up their lending to unprecedented levels, but banks are still charging each other extremely high borrowing rates — a bad sign for the credit markets that remain close to paralysis.

Traders will be closely watching the G-7 finance ministers meeting this weekend, and hoping the officials will consider guaranteeing lending between banks — which could potentially bring down the relentlessly high key lending rate known as Libor.

The London Interbank Offered Rate, or Libor, for three-month dollar loans jumped to 4.82 percent from 4.75 percent on Thursday. Just a month ago, three-month Libor was at 2.82 percent.

Libor is the rate at which banks make unsecured loans to one another. Investors in the stock market, where heavy selling continued today, aren't going to get any relief until bank-to-bank lending comes down. Not only does it represent how unwilling banks are to part with their cash, but the rate is directly tied to many consumer loans, including adjustable-rate mortgages. If those rates rise, that will mean more mortgage defaults and foreclosures.

The difference between three-month Libor and the three-month T-bill yield swung to its widest level in more than 25 years — indicating that banks are viewing loans to other banks as significantly more risky than government debt. The yield on the three-month T-bill fell as low as 0.12 percent today before recovering to 0.28 percent, still down from 0.58 percent late Thursday.

Overnight Libor has pulled back, a sign that banks were a bit more willing today to make extremely short-term loans. Libor for overnight dollar loans dropped to 2.47 percent today from 5.09 percent Thursday. That rate been very volatile lately, however, and remains well above the target fed funds rate, which the Federal Reserve lowered on Wednesday to 1.5 percent from 2 percent.

The fed funds rate is the overnight rate at which banks lend funds that are held by the Federal Reserve to other banks; the Fed therefore has some control over it. Libor, on the other hand, is the average bank-to-bank lending rate on the wholesale market, and a better benchmark for global short-term interest rates.

In one positive sign, rates on commercial paper have been coming down from lofty levels, which is good for companies that rely on short-term financing from that market. Commercial paper is a type of debt that's either unsecured or backed by assets like mortgages; companies sell it to get funding for maintaining payrolls, buying inventory and other operations.

Most top issuers today were selling commercial paper with one-to-seven day maturities at rates of less than 1 percent, according to Morgan Keegan fixed income analyst Kevin Giddis. Longer-term commercial paper rates were also largely lower. Commercial paper for 30 days from American Express, for example, slipped to about 2.75 percent today, he said, while 30-day paper from General Electric slipped to about 2.5 percent.

"It could change in a moment's notice," Giddis said. "But between last night and today, the flows that we've seen, the tone is a little better."

On Thursday, the Fed said that commercial paper outstanding dropped for the fourth straight week in the week ended Wednesday. Commercial paper outstanding has fallen by 30 percent to a seasonally adjusted $1.55 trillion since the summer of 2007. The Fed announced Tuesday that it will be buying commercial paper to keep that market more liquid.

Overall, though, investors and banks alike still appeared very nervous, flocking to Treasury bills as the stock market appeared to be headed for its eighth straight day of losses.