July 27 (Bloomberg) -- The rate banks say they charge each other to borrow in dollars for three months fell below 0.50 percent for the first time, signaling central banks’ efforts to end the two-year seizure in credit markets are working.

The London interbank offered rate, or Libor, for such loans dropped to 0.496 percent today, from 0.502 percent on July 24, the British Bankers’ Association said, taking its decline this year to 93 basis points. The rate, a benchmark for about $360 trillion of financial products around the world, peaked at 4.82 percent on Oct. 10 following the collapse of Lehman Brothers Holdings Inc. in September.

“I’m not saying the market has returned to normal, but my view is that the systemic risk we saw after the collapse of Lehman last autumn is perhaps gone,” said Christoph Rieger, co- head of fixed-income strategy at Commerzbank AG in Frankfurt. “Rates should stay low in the foreseeable future.”

The Federal Reserve has held its target interest rate between zero and 0.25 percent since December and U.S. authorities pledged $12.8 trillion in an attempt to combat the deepest recession in five decades. Financial institutions have posted writedowns and losses of more than $1.5 trillion since the start of 2007.

The Libor-OIS spread, a measure of the reluctance of banks to lend, was little changed at 31 basis points today, down from a peak of 364 basis points on Oct. 10.

Bank Survey

The spread, the premium banks charge over what traders predict the Fed’s daily effective federal funds rate will average over the next three months, averaged 11 basis points in the five years before the start of the credit crisis in August 2007. Contracts traded in the forward market indicate the gauge will drop to 25.5 basis points by July 2011.

Libor is derived from a survey of banks conducted by the BBA each day in London. Institutions are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies including dollars, euros and yen. The BBA then calculates averages, before publishing them by noon.

The falling cost of interbank loans is helping companies raise borrowing, adding to evidence the global economy is emerging from the deepest recession since World War II. U.S. companies sold a record $829 billion of debt in 2009, compared with $724 billion in the first three quarters of last year, according to data compiled by Bloomberg. Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times and June and lowered 886, JPMorgan Chase & Co. data show. The last time analysts were so bullish was in April 2007.

‘No Great Depression’

Fed Chairman Ben S. Bernanke said yesterday he sought to avoid a 1930s-style economic meltdown. The Fed rescued Bear Stearns Cos. and American International Group Inc. last year while backing the creation of the $700 billion Troubled Asset Relief Program.

“In a financial crisis, if you let the big firm collapse in a disorderly way, it will bring down the whole system,” Bernanke said yesterday at a town-hall-style meeting in Kansas City, Missouri. “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”

Purchases of new homes in the U.S. climbed 11 percent in June, the biggest increase in eight years, figures from the Commerce Department showed today.

The difference between the two-year swap rate and the yield on the Treasury note of the same maturity, which is known as the swap spread, dropped 1.14 basis points to 43.06 basis points, the least since July 13. The measure tends to be used as a gauge of investor perception of credit risk.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

Last Updated: July 27, 2009 12:21 EDT