Key lending rate falls to record low
London Interbank Offered Rate for 3-month loans slips below 1% for the first time as credit conditions and confidence rises.
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NEW YORK (CNNMoney.com) -- A key interbank lending rate fell to its lowest point on record Tuesday as credit market conditions continue to ease.
The 3-month Libor fell to 0.99%, dropping below 1% for the first time since 1986, when the British Bankers Association started keeping records.
Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London. It is a closely watched benchmark and is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor.
The 3-month rate stood at 1.01% on Friday. It was not quoted Monday because of the May Day holiday in Britain. The overnight Libor rate was unchanged at 0.24%.
"This is good news," said Gus Faucher, director of macroeconomics, at Moody's Economy.com. "It means that banks are trusting one another again and that we're getting to the bottom of the problems in the financial system."
The 3-month Libor soared to 4.8% in October after the collapse of brokerage Lehman Brothers, and the resulting market volatility caused banks and investors to hoard capital.
Faucher said a 3-month Libor in the range of 0.75% could indicate that the credit market is "pretty much functioning normally."
The so called TED spread, which measures the gap between 3-month Libor and the yield on the 3-month Treasury bill, now stands at roughly 80 basis points. A more narrow spread means banks are more willing to lend. It widened to 4.6 percentage points at the peak of the crisis in October.
The retreat below 1% comes after central banks around the world lowered interest rates and took drastic steps to encourage lending.
The Federal Reserve has slashed U.S. interest rates to near 0% and pumped billions of dollars into the financial system to boost liquidity. Central banks in Europe and Asia have taken similar steps.
Kim Rupert, a fixed income analyst at Action Economics, said banks have become more confident, and lending rates have come down, largely because of "central bank actions to provide massive amounts of liquidity around the world."
Bonds: Treasury prices fell further Tuesday after the government sold another $35 billion worth of 3-year notes.
The Treasury Department will offer a total of $71 billion worth of notes and bonds this week, raising concern about the record amounts of debt the government will issue to fund its economic stimulus and financial rescue programs.
Tuesday's auction of 3-year notes drew nearly $93 billion worth of bids, for a bid-to-cover ratio of 2.66. That's up from the previous month's auction, which received a smaller 2.42 bid-to-cover ratio, suggesting that demand remains robust.
The government will auction another $22 billion in 10-year notes Wednesday and $14 billion in 30-year bonds Thursday. Last week, the Treasury sold $101 billion worth of debt securities.
As the government floods the market with new issues, many analysts worry that hefty supply will continue to weigh on prices.
Bond prices: The benchmark 10-year note was down 5/32 at 96 17/32, and its yield ticked up to 3.17% from 3.16% late Monday. Bond prices and yields move in opposite directions.
The 30-year bond slid 9/32 to 90 10/32, and its yield rose to 4.07% from 4.06%.
The 2-year note was down 2/32 at 99 26/32, and its yield was 0.98%.
The yield on the 3-month rose to 0.19% from 0.18%. 
