Oct. 30 (Bloomberg) -- Money-market rates fell after the Federal Reserve lowered borrowing costs and agreed to pump $120 billion into Brazil, Mexico, South Korea and Singapore to help alleviate demand for dollar-based funding.

The swap agreements with central banks, which also followed rate cuts from China to Norway, led to a drop in three-month rates in Asia. The London interbank offered rate, or Libor, for three-month loans in dollars slid 23 basis points to 3.19 percent today, its 14th consecutive drop, according to the British Bankers' Association. The overnight dollar rate tumbled 41 basis points to 0.73 percent, an all-time low, the BBA said.

``The expansion of the swap lines will help, but more importantly there seems to have been some freeing up of money markets with cash being lent'' for terms longer than one day, said Barry Moran, a Dublin-based money-market trader at Bank of Ireland, the country's second-biggest lender.

Emerging-market stocks and currencies rallied. The South Korean won, which two days ago sank to a decade-low, jumped 14 percent today, the most since the currency soared 23 percent in December 1997. The Kospi Index climbed a record 12 percent, while Russia's Micex Index jumped 19 percent. The MSCI World Index of equities climbed 1.5 percent.

Lending among financial institutions, essential for economies to function, froze after Lehman Brothers Holdings Inc.'s bankruptcy on Sept. 15 sparked concern more banks would fail.

Corporate Bonds

The three-month Libor for dollars remains 219 basis points above the Fed's rate, up from 82 basis points the day Lehman failed. It was 192 basis points yesterday before the rate cut.

The difference between the rate banks charge for three- month dollar loans relative to the overnight indexed swap rate, the so-called Libor-OIS spread, narrowed 11 basis points to 253 basis points, from 364 basis points on Oct. 10 and 78 basis points two months ago. A basis point is 0.01 percentage point.

Investors are demanding the highest yields relative to government debt in at least a decade to buy corporate bonds amid speculation the government measures won't forestall a recession. The spread on European investment-grade company debt widened 25 basis points in the past week to 4 percentage points, the biggest gap since Merrill Lynch & Co. began collating the daily data in 1999. The spread was 0.83 percentage point last year.

Swap Accords

Companies in Europe sold 6.6 billion euros of bonds last week, below the 12-month average of 11.9 billion euros for a sixth week, according to data compiled by Bloomberg.

The Fed agreed yesterday to provide swap lines of $30 billion each to the four central banks to contain a funding squeeze in emerging markets. Under the terms of the accord, the foreign central banks are able to get dollars from the Fed and auction them in their own markets.

The arrangements aim ``to mitigate the spread of difficulties in obtaining U.S. dollar funding,'' the central bank said yesterday in a statement.

The announcement coincided with a decision by the International Monetary Fund to almost double borrowing limits for emerging-market countries, while waiving demands for economic austerity measures.

The Fed also created a $15 billion swap line this week with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.

Overnight Rates

The overnight Libor for dollars has fixed below the Fed's target rate for the past eight days as central banks worldwide flood the banking system with dollar funding.

``The market is simply awash with cash at the moment,'' said Sean Maloney, a London-based fixed-income strategist for Nomura International Plc. ``We've got unlimited dollar funding going into the overnight market which is really driving the rate right down. The central banks have succeeded in getting the wheels turning again.''

U.S. policy makers cut their target rate yesterday by 50 basis points to a more than four-year low of 1 percent. Taiwan and Hong Kong also trimmed their benchmark rates.

Credit markets are thawing after the Fed acted in concert with central banks worldwide to offer unlimited dollar funding and governments bolstered bank balance sheets. The ECB said its outstanding euro loans to banks rose to 773.7 billion euros ($1.01 trillion) yesterday, the largest amount on record. The figure does not include the ECB's dollar loans.

Commercial Paper

Corporate borrowing in the commercial paper, or CP, market rose for the first time in seven weeks, with the amount outstanding climbing by a record $100.5 billion, or 6.9 percent, to a seasonally adjusted $1.55 trillion for the week ended Oct. 29, the Fed said today in Washington. CP is used by companies to finance daily expenses such as payroll and rent.

Quoted rates on seven-day commercial paper fell 25 basis points today to 1 percent, the lowest level since June 2004, according to yields offered by companies and compiled by Bloomberg. Rates on the highest-ranked CP due in 90 days slipped 3 basis points to a six-week low of 2.82 percent.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the British Bankers' Association by noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms ranging from one day to a year.

Asian Rates

Hong Kong's three-month interbank offered rate, or Hibor, slid 15 basis points to 3.39 percent, according to the Hong Kong Association of Banks. The rate for U.S. dollar loans in Singapore, or Sibor, declined 15 basis points to 3.28 percent, the 12th straight drop and the lowest since Sept. 17.

``The swap lines are not unlimited but at least they will take a lot of tension out of the credit markets,'' said Mark Tan, an economist at Goldman Sachs Group Inc. in Hong Kong. ``The inclusion of Singapore is an extension to the region because it's the center for Asia's dollar markets.''

Taiwan lowered its discount rate for 10-day loans to 3 percent from 3.25 percent, while China reduced its one-year lending rate to 6.66 percent from 6.93 percent. The Hong Kong Monetary Authority cut its base rate to 1.5 percent from 2 percent.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net

Last Updated: October 30, 2008 12:31 EDT