More Signs of Credit Easing

Bank-to-bank lending rates dip again, the day after the U.S. government unveils its plan to buy equity in banks.

NEW YORK (CNNMoney.com) -- The credit markets continued to show signs of relief Wednesday after the U.S. federal government announced a plan to get capital directly into banks by buying their stock.

The overnight bank-to-bank lending rate slid, with the London interbank overnight rate (Libor) slipping to 2.14% from 2.18%Tuesday, according to data obtained from Bloomberg.com. The measure had been as high as 5.09% Thursday.

When the rate at which banks are willing to lend to each other decreases, that is a positive sign for the credit markets, and eventually translates into lower borrowing costs for consumers.

Frozen pipelines of credit stalled the economy in the United States and around the world, pushing lawmakers to make global coordinated efforts to increase liquidity in the markets and give banks the confidence to begin lending to each other again.

On Tuesday, the government announced that the Treasury will buy up to $250 billion in senior preferred shares in a variety of banks, and so far, nine banks have agreed to have the government take a stake. In addition, the Federal Deposit Insurance Corp. will temporarily provide unlimited coverage for all non-interest-bearing accounts.

Despite a slew of historic and extraordinary moves, however, it could take a while for the economy to return to health.

Market gauges: The 3-month Libor continued its descent, ticking lower to 4.55% from 4.64% Tuesday, according to data from Dow Jones. The measure had reached 4.82% Friday, the highest since mid-December 2007. On Sept. 15, by contrast, it was only 2.82%.

Libor is a daily average of what 16 different banks charge other banks to lend money in London and is used to calculate adjustable rate mortgages. The higher the rate, the tougher it could be for homeowners to pay those mortgages. Libor is also used to calculate other types of loans, including student and auto.

A market gauge known as the "TED spread" was 4.20%, after moving between 4.30% and 4.09% Tuesday.

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 bigger the aversion to risk. The spread was 1.04% just a little more than a month earlier and reached a record high of 4.65% on Friday.

Another indicator, the Libor-OIS spread, dipped to 3.35% from 3.39% Tuesday, after touching a record high 3.67% Friday. The Libor-OIS spread measures how much cash is available for lending between banks, and is used by banks to determine lending rates. The bigger the spread, the less cash is available for lending.

Treasurys: Treasury prices rallied Wednesday as stocks retreated from their rallying points earlier in the week.

The benchmark 10-year note was up 17/32 to 99-29/32 while its yield fell to 4.02% from 4.07% late Tuesday. Bond prices and yields move in opposite directions.

The 30-year bond rallied 23/32 to 104-13/32 while the yield decreased to 4.24% from 4.27%.

The 2-year note ticked up 5/32 to 100-16/32 and its yield dipped to 1.75% from 1.81%.

The yield on the 3-month Treasury note was at 0.35%, up from 0.27%. The yield is closely watched as an immediate reading on investor confidence. Investors and money-market funds shuffle funds into and out of the 3-month Treasury bill frequently, as they assess risk in the rest of the marketplace.

After the stock market's 936-point rally on Monday, investors dumped Treasurys in favor of the more profitable equity markets. However, after watching Wall Street's more tepid performance Tuesday, with the Dow closing down 76 points, investors returned to the bond market, causing prices to bounce.

Government debt is considered by investors to be among the safest assets, and so in times of uncertainty, demand for Treasurys increase, sending the price higher.

Investors also shift their funds in and out of the Treasury market based on the movements in the stock market. While government bonds are safe, they do not offer high returns.