All about business

Lending rates fell again Friday, but as the cost of borrowing eases, some government data suggest private lending is not expanding.

The 3-month Libor rate dropped to 2.29% from 2.39% on Thursday, according to Dow Jones, marking the rate’s lowest point since Nov. 12, 2004.

The overnight Libor rate held steady at 0.33%, according to Bloomberg.com. The overnight rate is just a hundredth of a percentage point above the all-time low.

About a month ago, 3-month Libor was at 4.82%, and the overnight rate was at an all-time high of 6.88%. Lower rates are a major boost for the strangled credit markets because more than $350 trillion in assets are tied to Libor.

A number of U.S. government programs aimed at easing funding concerns for banks and encouraging lending between financial institutions have also helped lower Libor rates. Such initiatives include lowering interest rates, injecting capital into banks and providing insurance on all non-interest bearing accounts.

Falling Libor rates are "a very important ingredient" in the recipe for economic recovery, said Michael Strauss, chief economist at financial research firm Commonfund.

"Improvement in the Libor market is an important first step towards getting banks to act like banks again," Strauss said.

As financial institutions become more confident in lending to each other, they will become more willing to lend to businesses and consumers, according to Strauss.

But with the economy likely in a recession, some indications show the Federal Reserve’s programs and lower rates have not yet encouraged banks and free market investors to lend to businesses.

The Fed announced Thursday that it lent another $100 billion to companies over the past week through a new short-term funding program. In its so-called Commercial Paper Funding Facility, the Fed has provided critical short-term financing to businesses and financial institutions in desperate need of cash.

But in a separate report, Fed data showed the market for commercial paper expanded by just $50.5 billion. Even as the Fed’s program has dragged down borrowing rates, the difference of $49.5 billion between the Fed’s injection and the market’s growth suggests that the commercial paper market would have contracted without the Fed’s involvement.

In another indication that the central bank’s actions have not yet persuaded others to join it in lending, banks still borrowed an average of $110 billion a day from the Fed’s emergency lending window, down just a hair from the record set the week before. Banks continued to borrow a staggering amount from the central bank despite the Treasury’s $250 billion capital injections into financial institutions and access to the commercial paper facility.

The poor lending environment was echoed in the Federal Reserve’s survey of senior loan officers. According to the survey, released this week, banks and individuals reported that loans were available over the past three months but that demand for them declined as companies opted instead to hoard cash and take less risky bets.

"There is a fear that improvement in the credit market will not sustain itself," Strauss said. But he thinks monetary policymakers have acted appropriately and he expects to see more aggressive fiscal policy moves soon.

"Steps are being taken to eventually alleviate some challenges of recession," he said cash advance loans.

Though credit remains tight, two key gauges of risk sentiment indicated that confidence is returning.

The Libor-OIS spread fell to 1.75 percentage points from 1.83 points on Thursday. The spread measures the difference between actual borrowing costs and the expected official borrowing rate from the Fed. It is used as a gauge to determine how much cash is available for lending between banks. The bigger the spread, the less cash is available for lending.

Former Fed chairman Alan Greenspan has said that the Libor-OIS spread will serve as a good gauge for when credit has returned to normal. Though the indicator has fallen from a high of 3.66 points set last month, it is still far above the 0.11 percentage points seen prior to Sept. 15.

Another indicator, the "TED spread," fell to 1.89 percentage points from 2.08 points, falling below 2 points for the first time since the financial crisis gripped Wall Street.

The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the less willing investors are to take risks.

U.S. Treasury prices fell Friday as investors responded to the Department of Labor’s monthly employment report.

The nation’s economy lost 240,000 jobs in October and the unemployment rate rose to 6.5% from 6.1% the month before, according to the Labor Department. So far this year, employers have cut 1.2 million jobs.

Bonds have recently made very small movements in either direction, as investors weigh the rising cost of the financial bailout with what appears to be a deep and prolonged economic recession.

The government said Wednesday it will auction off $25 billion in new 3-year notes and $20 billion in 10-year notes next week. The auctions are part of the Treasury’s plan to borrow $550 billion in the fourth quarter as it looks to fund the massive financial rescue costs.

The benchmark 10-year note slipped 23/32 to 101-24/32, and its yield rose to 3.78% from 3.69% late Thursday. Bond prices and yields move in opposite directions.

The 2-year note fell 3/32 to 100-10/32, and its yield rose to 1.33% from 1.28%.

The 30-year bond lost 26/32 to 104-8/32, and its yield rose to 4.24%.

The yield on the 3-month bill fell to 0.28% from 0.3%. The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence. Investors and money-market funds shuffle money into and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace. A lower yield indicates that investors are less optimistic.

Did you vote for Obama? How do you think the new president will affect your wallet? What do you think Obama needs to do to fix the economy - both in the short run and the long term? What should be first on the new Congress’s agenda? E-mail us your thoughts, including your name, photo and contact info; the best answers will be featured in an upcoming CNNMoney.com article. 

Source