Interbank Rates Show More Credit Stress

The move, aimed at improving confidence in ailing money markets, proved only partially successful, however, as term funding pressures tightened further.

According to data from the British Bankers' Association, overnight U.S. dollar Libor fell to 5.09375%, versus Wednesday's fixing of 5.375%.

But longer-term funding pressures tightened despite increased market speculation of further monetary easing by central banks.

Analysts noted that in the current risk-averse environment, banks remained reluctant to lend to each other on heightened concerns over counterparty risk.

"The money market mechanism remains logjammed," said Don Smith, market economist at ICAP in London. "The measures announced by central banks are not seen as a quick fix and they'll take time to have an impact."

According to a London-based money markets broker, banks still preferred to hoard cash rather than lend on, despite the coordinated rate cuts.

The key three-month U.S. dollar rate climbed to 4.75%, the highest this year, from 4.52375% Wednesday, with the one-month jumping to 4.5125% from 4.29375%.

The three-month BOR/OIS spread, a gauge of stress in the money markets, widened to a record 351 basis points from around 317bps Wednesday.

Overnight liquidity injections by the Bank of England and the European Central Bank attracted strong demand from banks, although rates fell.

The BOE offered $10 billion in overnight funding and received bids totaling $9.921 billion, above Wednesday's $8.56 billion. The average accepted rate fell to 3.075% from Wednesday's 3.592%.

Meanwhile, the ECB increased the size of its overnight operation, allotting $100 billion at a marginal rate of 5.00%, sharply down from 9.50% Wednesday. Bids totaled $116.154 billion, down from a record $122.0 billion Wednesday.

Overnight sterling Libor fell to 5.41875% from 5.83125% Wednesday, one day after the BOE lowered its Bank rate to 4.50% from 5.00% as part of the coordinated central bank action.

Longer-term funding pressures rose, despite the U.K. government's banking sector rescue plan and the prospect of still lower interest rates. According to SONIA rates, another 25bps cut is fully expected at the Monetary Policy Committee's November meeting.

"The cumulative effects of all the measures announced should see an easing of Libor rates over time," noted Moyeen Islam, market strategist at Barclays Capital, "particularly in sterling, where the U.K. Treasury's guarantee of wholesale market borrowing for up to three-year maturities should promote a pickup of interest in short-dated new issues from the banking sector, so easing the pressure on the interbank market."

The key three-month sterling Libor rose to 6.28125% from 6.27125% Wednesday, while the one-month climbed to 6.08688% from 6.075%.

-- Keith Jenkins, Dow Jones Newswires