Signs of limited credit thaw emerge in money markets

By Jamie McGeever and Richard Leong

LONDON/NEW YORK (Reuters) - Banks cut the rates they charge each other for overnight loans in U.S. dollars and euros on Friday, and the rate on one-day corporate IOUs eased from Thursday, providing tentative signs that some corners of the credit market are thawing.

Still, rates for longer interbank loans pushed higher again Friday, and the drop in overnight rates was not universal. The cost to borrow pounds sterling funds overnight jumped as dealers reported some U.K. banks faced a shortage of cash.

And even though overnight rates in some countries moved closer to central bank targets they remain well above where they were four weeks ago before the bankruptcy of investment bank Lehman Brothers locked up credit markets around the world.

"Things are still stressed. There is no question," said James Caron, head of global rates research at Morgan Stanley in New York.

The London interbank offered rate for overnight sterling funds was fixed almost 40 basis points higher at 5.81250 percent, more than 140 basis points above the Bank of England's target rate of 4.5 percent.

Overnight dollar Libor was fell by half, fixing at 2.46875 percent compared with Thursday's rate of 5.09375. Overnight euro Libor fixed at 3.89250 percent, down from 3.93625 percent the previous day.

The jump in sterling overnight rates was the most eye-catching change in the Libor fix, particularly following the Bank of England's half percentage point rate cut on Wednesday.

The Federal Reserve, European Central Bank and other major central banks cut benchmark interest rates this week in a coordinated global coordinated move.

"There's a very big shortage of sterling and the rates are going up again," said one analyst. "But the dealers are not too concerned since it looks like a containable shortage that may ease later in the day as people get a better idea of their cash balances."

START OF CP THAW?

Interest rates on U.S. overnight commercial paper also fell on Thursday, according to the most recent data available from the Federal Reserve. That suggests the start of a thaw after global government efforts to resuscitate ailing credit markets.

The $1.55 trillion CP market, where companies raise funds to meet day-to-day operating needs, has been in near paralysis for almost a month, leaving many companies scrambling to find alternative sources of funding.

Improvement in the commercial paper sector is considered vital to a turnaround of the credit crisis, which began more than a year ago, analysts said.

In fact, it may be cheaper for some banks to issue overnight CP than borrow from the interbank market.

Interest rates on overnight CP issued by AA-rated, or mid-investment grade, financial companies averaged 1.71 percent on Thursday, down from 2.59 percent on Wednesday, according to the Fed.