Money-Market Rates Drop as Banks Get Bailouts

By Gavin Finch and Patricia Lui
Tuesday, October 21, 2008

Money-market rates fell yesterday, extending last week's declines, as governments bailed out banks and policymakers intensified efforts to combat the freeze in lending with cash injections.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars slid 36 basis points, to 4.06 percent, the biggest drop in nine months, according to the British Bankers' Association. The overnight-dollar rate declined 16 basis points, to 1.51 percent, the lowest level in more than four years. The Libor-OIS spread, a measure of cash availability, dropped below 300 basis points for the first time in almost two weeks. Rates on three-month Treasury bills rose to a one-month high.

"The policies put in place by authorities around the world have clearly reduced the risk of more bank defaults," said Nick Stamenkovic, a fixed-income strategist in Edinburgh, Scotland, at RIA Capital Markets. "I expect interbank rates to continue to gradually decline over the coming weeks as central banks flood the market with cash."

Interbank lending evaporated after Lehman Brothers filed for bankruptcy protection on Sept. 15, shattering confidence among lenders and sending borrowing costs to records.

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