Oct. 8 (Bloomberg) -- Overnight corporate borrowing costs jumped, default risk increased and the bond market remained all but closed after central banks worldwide cut interest rates, showing unprecedented government intervention was failing to aid companies struggling to finance themselves.

Overnight rates on dealer-placed commercial paper rose 56 basis points to 3.5 percent, while the cost of protecting corporate bonds from default rose. Two issuers sold $750 million of U.S. company bonds this week, compared with the weekly average this year of $16.8 billion.

The coordinated rate cuts come as companies struggle to fund daily operations and economists say the world is already mired in a recession. The Federal Reserve joined the European Central Bank and four others today in lowering interest rates by as much as half a percentage point in a coordinated effort to unlock short- term credit markets frozen since Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in history on Sept. 15.

``We've reached the point where so many of these government plans have fizzled that the reaction is reserved until we actually see the impact,'' said Christopher Low, chief economist at FTN Financial in New York. ``They can't stop a recession. What they can do hopefully is prevent a really nasty recession.''

The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, whose rate is already 0.5 percent, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point.

`On the Sidelines'

``The reality is there's no private sector balance sheet willing to step in so the Fed and the Treasury are becoming the only balance sheet,'' said Mark Kiesel, executive vice president at Pacific Investment Management Co., the manager of the world's biggest bond fund. ``In a market that lacks trust and confidence the private sector is on the sidelines.''

Today's rate cut follows the Fed setting up a fund yesterday to buy commercial paper, seeking to unblock the financing tool that drives everyday commerce for American businesses. The unit will purchase three-month dollar-denominated commercial paper at a spread over the three-month overnight-indexed swap rate.

``I don't expect any significant improvement until the program is up and running,'' Low said.

The $1.6 trillion market for commercial paper, which typically matures in 270 days or less, is used by companies to finance payroll, rent and other daily expenses. Issuers post the commercial paper rates they are willing to pay each morning.

Borrowing Options Dwindle

The market slumped last week by a record $94.9 billion, on a seasonally adjusted basis, led by financials and debt backed by assets, according to Fed data. Average overnight rates on dealer- placed commercial paper soared to an eight-month high of 3.95 percent last week, from 2.08 percent less than a month ago.

Corporate borrowing options have dwindled as the investment- grade bond market remained all but closed for a fifth week. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market's disruption.

Investment-grade bond yields yesterday rose to 7.98 percent, the highest since July 2000, according to Merrill Lynch & Co.'s U.S. Corporate Master index. Spreads relative to Treasuries widened 6 basis points to a record 514 basis points, more than five times their level in February 2007.

Default Risk

Credit-default swaps linked to the debt of retailers including Plano, Texas-based J.C. Penney Co. jumped 45 basis points to 320 basis points, according to CMA Datavision, as the economic slump threatens to ruin holiday sales. Contracts on Nordstrom Inc. widened 30 basis points to a record 270, and Office Depot Inc. widened 46 to 700, CMA data show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase in the contracts suggests deterioration in investor confidence.

The cost to protect against a default on U.S. high-yield, high risk loans also rose, the Markit LCDX index shows. The price of the index, which falls as sentiment deteriorates, dropped 0.5 percentage point to 89.1, according to Goldman Sachs Group Inc.

General Electric

Some direct issuers of commercial paper today lowered the rates they offer on the debt. General Electric Co. is willing to pay 1.25 percent on one-day paper, down 65 basis points from yesterday, according to Bloomberg data. GE cut the yield on 30- day paper by 45 basis points to 2.4 percent, the lowest in three weeks, Bloomberg data show. GE Capital, the finance arm of Fairfield, Connecticut-based GE, has $67.3 billion of commercial paper outstanding, the most of any company.

New York-based American Express Co., the biggest U.S. credit-card company by purchases, reduced its overnight offer rate 25 basis points to 1.75 percent. A basis point is 0.01 percentage point.

Before the global rate cut was announced, the London interbank offered rate, or Libor, that banks charge for such loans jumped 144 basis points to 5.38 percent, the third-straight increase, the British Bankers' Association said today.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 3.87 percentage points, after widening to as much as 4.03, the most since Bloomberg began compiling the data in 1984.

``I do believe over time policy will work,'' said Kiesel, who oversees $180 billion of corporate bonds in Newport Beach, California. ``The problem with all these measures is it operates with a lag and the deleveraging is real time. The deleveraging cycle is operating on a real time basis much faster than policy can overcome it.''

`Stop the Bleeding'

The world economy has already fallen into its first recession since 2001, according to JPMorgan Chase & Co. economists Bruce Kasman and David Hensley. The U.S. is ``definitely in a recession,'' Low said.

Money-market funds, the biggest buyers of commercial paper, began to flee the market three weeks ago, pushing yields to the highest since January and persuading the Fed yesterday to backstop the market.

Prime money-market funds have pulled $200.3 billion of assets from commercial paper since Sept. 16, the day after Lehman filed for the biggest bankruptcy ever, and built up their safer government debt holdings instead, according to IMoneyNet Inc., a research firm based in Westborough, Massachusetts, that tracks money funds.

The central bank interest rate cuts should ``stop the bleeding'' in money-market funds, Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts, said in an interview.

``The rate cuts will help there's no doubt about that,'' he said. ``For money funds, they're manna from heaven.''

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: October 8, 2008 15:02 EDT