Oct. 29 (Bloomberg) -- Money-market rates in London dropped as cash injections by central banks and the prospect of deeper reductions in borrowing costs worldwide showed signs of revitalizing confidence in lending.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 5 basis points today to 3.42 percent, its 13th straight decline, according to the British Bankers' Association. The comparable euro rate slipped 2 basis points to 4.83 percent, the 15th consecutive reduction. Asian rates were lower.

``The strains in money markets are beginning to ease, but only at a glacial pace,'' said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets. ``Central banks are flooding the money markets with liquidity and that's bringing rates down. Banks remain very wary of lending to one another though, and I don't see that changing anytime soon.''

Credit markets are thawing after the Federal Reserve began buying commercial paper from companies and policy makers worldwide provided cash-strapped banks with unlimited access to dollar funding. Today, the European Central Bank loaned banks $106.6 billion for one week and 103.1 billion euros ($132 billion) for three months. The Fed today lowered the rate it's willing to accept for commercial paper.

Bond Insurance

The three-month dollar Libor has dropped 140 basis points since Oct. 10, when it rose to 4.82 percent, the highest since Dec. 27. The comparable rate for euros lost 56 basis points since Oct. 8, the last time it increased.

The cost of protecting European corporate bonds from default dropped today to the lowest level this week and U.S. contracts declined for a second day, according to traders of credit-default swaps, suggesting falling borrowing costs are boosting confidence in the ability of companies to pay their debt.

Credit markets, which began seizing up after BNP Paribas SA halted withdrawals on three funds in August 2007, froze last month after Lehman Brothers Holdings Inc. collapsed on Sept. 15.

The three-month interbank offered rate for Hong Kong dollars, or Hibor, declined 30 basis points today, the most in a week, to 3.54 percent, according to the Hong Kong Association of Banks. The comparable rate for U.S. dollar loans in Singapore, or Sibor, dropped 5 basis points to 3.43 percent, the lowest since Sept. 24.

``Sentiment has improved given easing in Libor and measures taken by the central banks,'' said Ong Hock Ann, a money-market trader at ING Private Bank Ltd. in Singapore. ``Rates are still not back to normal levels as there's still concern that people would rather keep cash for themselves than blow their balance sheets again as year end approaches.''

Rate Bets

The three-month Libor for dollars remains 192 basis points above the Fed's rate, up from 80 basis points three months ago. The Libor-OIS spread was at 261 basis points today, compared with 87 points before Lehman filed for bankruptcy.

Futures on the Chicago Board of Trade show a 50 percent chance the Fed will lower its target for overnight bank loans today to 0.75 percent from 1.5 percent. The odds were zero a week ago. The rest of the bets are for a half-point reduction.

The chances that Japan will cut its overnight rate by half to 0.25 percent on Oct. 31 rose to 50 percent, from 8 percent yesterday, according to calculations by JPMorgan Chase & Co., after the Nikkei newspaper said the Bank of Japan is leaning toward that decision.

The Fed lowered the rate it's willing to accept for unsecured commercial paper by 5 basis points to 2.84 percent. The yield on CP backed by assets such as mortgages and auto loans was lowered by the same amount, to 3.84 percent. The rates are set under the Fed's Commercial Paper Funding Facility.

Commercial Paper

Quoted rates on 90-day CP fell 7 basis points today to a five-week low of 3.12 percent, according to yields offered by companies and compiled by Bloomberg. Rates on the highest-ranked commercial paper due in 30 days dropped 8 basis points to 2.94 percent, about the lowest in four years. CP is used by companies to finance daily expenses such as payroll and rent.

The Fed also arranged more than $600 billion in international swap lines to meet demand for the U.S. currency, including a $15 billion line with the Reserve Bank of New Zealand ``to address ongoing, elevated pressures in U.S. dollar short-term funding markets,'' the Fed said in a statement.

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.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Last Updated: October 29, 2008 10:38 EDT