Dec. 19 (Bloomberg) -- The Federal Reserve, European Central Bank and Swiss National Bank loaned $34 billion in 28- day funds through special auctions as part of a global attempt by central banks to restore faith in the money markets.

The Fed auctioned $20 billion in loans at an interest rate of 4.65 percent, less than the 4.75 percent the U.S. central bank charges financial institutions to borrow directly at its discount window, suggesting banks weren't desperate to obtain funds. The ECB auctioned $10 billion in loans denominated in dollars, while the Swiss National Bank lent $4 billion, the central banks said in statements today.

Borrowing costs have soared following the collapse of the U.S. subprime-mortgage market, with the three-month euro rate climbing to a seven-year high of 4.95 percent last week, from 4.26 percent on July 31. The central banks, along with those in Canada and the U.K, announced plans on Dec. 12 to move in concert to alleviate the credit squeeze threatening global growth, in the biggest act of international economic cooperation since the Sept. 11 terrorist attacks.

``This was the best possible result that the Fed could hope for,'' said Ajay Rajadhyaksha, head of fixed-income strategy in New York at Barclays Capital Inc., a primary dealer that trades directly with the Fed. ``It came in 10 basis points below the discount rate, which presumably means it's doing what it is supposed to, which is alleviate liquidity pressures in the system much more than the discount window seemed to do.''

The Term Auction Facility, dubbed TAF, made funding from the Fed available beyond the 20 authorized primary dealers. The Fed will auction $20 billion in 35-day funds tomorrow at a minimum bid of 4.15 percent.

Credit Market Turmoil

Yields on three-month Treasury bills, viewed by investors as a haven from turmoil, increased initially after the auction results were released. Yields resumed their decline after Standard & Poor's lower ratings outlooks for MBIA Inc. and Ambac Financial Group Inc., the two biggest bond insurers. The yield on the bills dropped 11 basis points to 2.92 percent at 2:49 p.m. in New York.

``TAF gets us over year-end,'' said T.J. Marta, a fixed- income strategist in New York at RBC Capital Markets. ``It's a hypodermic in the heart. The insurers are the cancer eating away at the patient.''

Perceived Risks

Former Fed governor Wayne Angell said the joint actions by the central banks are doing little to address the broader problem of banks being unwilling to lend to each other because of concern about what type of collateral they'll receive.

``This is all just a political event,'' said Angell, who now heads Angell Economics in Arlington, Virginia. ``It's really all about the overnight cost of money. It's helpful that Libor rates come down but what matters is how much it is above the central banks' target rate.''

The spread between the U.S. two-year swap rate and two year Treasury yields, viewed as a measure of investors' perception of credit risk, narrowed to as little as 81.44 basis points today, the least since Nov. 15. The swap spread has contracted about 24 basis points from an almost two-decade high of 107 on Dec. 11. The rate widened back out to 82.54 basis points. A basis point is 0.01 percentage point.

TED Spread Widens

The difference between three-month U.S. Treasury bills and the three-month London Interbank Offered Rate, known as the TED spread, widened 10 basis points to 1.99 percentage point. The difference was 35 basis points at the start of the year.

The implied yields on Eurodollar futures contracts, which signal predictions for the three-month dollar Libor, rose immediately after the TAF announcement and are little changed now. The implied yield on the contract that expires in March 2008 is 4.315 percent, down 0.03 basis points from yesterday.

Financial institutions submitted $61.553 billion in bids to the Fed, resulting in a bid-to-cover ratio of 3.08. There were 93 bidders, the U.S. central bank said.

``This facility reallocates funds from one segment of the banking sector to another,'' said Federal Reserve Bank of Richmond President Jeffrey Lacker said in Charlotte, North Carolina. ``It is not clear this facility is going to address the fundamental issues driving what is going on in interbank markets, which are the constraints on balance sheets and the need of some institutions to raise capital and more fundamentally concerns about counterparty credit risk.''

`Demand For Money'

The ECB added an unprecedented $500 billion yesterday into the banking system, pushing down borrowing costs. The amount banks charge each other for two-week loans in euros dropped for a second day, after declining a record 50 basis points yesterday to 4.45 percent. The Bank of England held the first of two special operations yesterday, offering three-month loans in pounds.

``This shows that there is definitely demand for money,'' said George Goncalves, chief Treasury and agency debt strategist in New York at Morgan Stanley, a primary dealer. ``As we are heading into the critical time period of the year, we would not be surprised to see the next TAF auction rate come even higher.''

To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

Last Updated: December 19, 2007 14:56 EST