Borrowing rates stop rising

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NEW YORK (CNNMoney.com) -- After rising for much of last week, key lending rates hit the brakes Monday. Treasurys rose at the beginning of a week that economists expect will deliver a slew of ugly economic indicators.

The 3-month Libor rate held steady at 2.24%, and the overnight Libor rate fell to 0.4%, according to Bloomberg.com. Libor, the London Interbank Offered Rate, is a daily average of interbank lending rates and a key barometer of liquidity in the credit market. More than $350 trillion in assets are tied to Libor.

Analysts attributed the recent rise in rates to Treasury Secretary Henry Paulson's abandonment of troubled asset purchases. Paulson said the Treasury is no longer intending to use the remainder of the $700 billion in financial rescue funds to buy up toxic mortgage-backed securities from banks' balance sheets, and will instead continue with capital injections.

But others said it was just a bump in the road, and rates will continue to fall as the government pours more and more money into financial institutions to boost liquidity.

Though rates fell, two market gauges showed banks' confidence in the credit market was waning.

The Libor-OIS spread rebounded to 1.75 percentage points from 1.72 on Friday. The spread measures the difference between actual borrowing costs and the expected targeted 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.

Another indicator, the TED spread, also jumped to 2.14 percentage points from 2.10 points. 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.

Treasury prices were mostly higher Monday after economic data released in the morning was weak, but better than expected.

The NY Empire State Index, a regional manufacturing report, slipped 0.8 points to a reading of minus 25.4 in November from minus 24.6 in October. But the reading was better than the minus 26 reading that analysts surveyed by Briefing.com had forecast.

Also Monday, the Federal Reserve reported that industrial production grew 1.3% - far better than the 0.2% increase economists had expected. But the rise was only due to September's enormous drop-off in production, because of Hurricanes Gustav and Ike.

The rest of the week will bring a number of other economic indicators that are expected to be equally as disappointing. With the economy likely in a recession, investors continued to buy up bonds as a safe-haven investment.

The benchmark 10-year note rose 18/32 to 100-23/32, and its yield slipped to 3.66%. Bond prices and yields move in opposite directions.

The 2-year note was up 1/32 to 100-18/32, and its yield fell to 1.19% from 1.21%.

The benchmark yield curve, the difference between the 2-year and the 10-year yield, narrowed to 2.47 percentage points from a five-year high of 2.54 points set Friday. The yield curve is a key measure of investor sentiment, with a higher curve indicating a weaker economic environment.

The 30-year bond rose 13/32 to 105-4/32, and its yield fell to 4.20% from 4.36%.

The yield on the 3-month bill fell to 0.10% from 0.14%. It was the lowest yield for the 3-month bill since Sept. 17 - two days after Lehman Brothers' collapse and the beginning of the credit crisis.

The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence, with a lower yield indicating less optimism. 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.