Short-term interest rates declined early Tuesday, as several central banks in Europe injected more cash into the financial system. The London rate for three-month loans in dollars fell 4 basis points to 3.47%, its 12th straight daily decline. The three-month rate for the euro, or Euribor, fell 5 basis points to 4.85%. However, interest rates in Asia rose, with the Hong Kong interbank offer rate, or HIBOR, rising 10 basis points to 3.84%
In addition, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, narrowed 14 basis points to 262 basis points Tuesday. The TED spread has now declined 172 points from 434 basis points more than a week ago.
Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.
Credit market rates: inching lower
Economist Peter Dawson said the credit markets have notched another day of improvement. "Again, it's going to be slow process, two days down, one day up, etc. It took longer than a month to get into the credit crisis, so it's certainly going to take longer than a month to get out of it," Dawson said.
Further, Dawson said it looks like bank-to-bank confidence is increasing, as the supply of dollars in the system continues to rise.
The LIBOR is particularly important because it determines rates on $360 trillion of financial products worldwide, from home loans to derivatives.
U.S. and European governments have now pledged as much as $3.2 trillion to unfreeze credit markets, meet demand for dollars, and recapitalize banks.
Monetary Policy / Economic Analysis: Effective short-term corporate rates remain too high, but the long-term trend remains pointed in the right direction: down. Central banks must continue to inject dollars into the financial system to break the back of lingering lending reluctance in the system.
Entrepreneur's Journal: Key steps for telesales success
The week in preview: Focus returns to earnings: Alcoa, Chevron, Family Dollar
Comfort Zone Investing: Survival of the fittest -- letting some banks fail
