Credit crisis eases a bit, but strain remains

— -- Credit markets showed signs of thawing Thursday but remain far from normal.

In two signs of continued strain, a key bank-to-bank lending rate rose Thursday to its highest level this year, and the amount of commercial paper in the market fell for the fourth week in a row.

Today, the market's strength may be further tested by an auction of securities sold as protection against Lehman Bros. defaulting on its debt.

According to analysts at IFR, the Lehman auction may involve contracts nominally worth as much as $400 billion and could be prompting banks that sold the protection to hoard cash.

The London Interbank Offered Rate, or LIBOR, for three-month dollar loans rose to 4.75% from 4.52% Thursday. LIBOR, set by 16 banks in a daily survey by the British Bankers' Association, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives.

A month ago, the three-month LIBOR was 2.81%.

Meanwhile, commercial paper outstanding has fallen 15% below its level in mid-September. Many companies sell commercial paper to raise short-term cash, often to meet payrolls or maintain inventories. The Federal Reserve said commercial paper outstanding fell by $56.4 billion to a seasonally adjusted $1.55 trillion in the week ended Oct. 8 — that's down from $1.82 trillion on Sept. 10.

However, in a sign that central banks' actions to ease the credit crunch may be helping, borrowing costs for companies fell to the lowest in almost two weeks, according to data compiled by Bloomberg.

There also were other hopeful signs of activity among corporate and municipal borrowers.

IBM raised $4 billion in the biggest U.S. bond sale in five weeks after the company said its profit this year will hold up against the financial crisis.

Massachusetts sold $750 million of short-term notes Wednesday. Long-term municipal bond offerings this week are the highest for any week since mid-September.

That was encouraging news for California Gov. Arnold Schwarzenegger, whose state is beginning to sell $7 billion in notes. The recent passage of the $700 billion financial rescue plan and other actions "appear to be improving liquidity," he said in a letter to Treasury Secretary Henry Paulson Thursday.