The credit markets might not be quite as squeezed as they have been recently, thanks to the Federal Reserve's interest rate cut. But they're hardly back...

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NEW YORK — The credit markets might not be quite as squeezed as they have been recently, thanks to the Federal Reserve’s interest rate cut. But they’re hardly back to normal.

In two signs of continued strain, a key bank-to-bank lending rate rose today and the amount of commercial paper in the market fell for the fourth straight week to 15 percent below the level before the investment bank Lehman Brothers filed for bankruptcy.

While lending doesn’t appear to be in the same seized-up state as last week, the year-end could prove a difficult time for funding as banks and other institutions try to get their books in order, said Kim Rupert, managing director of global fixed income analysis at Action Economics.

“It looks like the central bank’s actions are starting to help marginally improve confidence enough where safe haven isn’t the only thing on investors’ minds,” Rupert said. “But it’s only one small step so far. It’s going to be a very jagged type of improvement. There’s still a lot of factors that are going to keep anxiety at elevated levels.”

The London Interbank Offered Rate, or Libor, for three-month dollar loans rose to 4.75 percent from 4.52 percent on Wednesday. Just a month ago, three-month Libor was at 2.81 percent.

That stubbornly high Libor is just one of the reasons that the stock market has been tumbling. When banks are loath to lend, a weak economy has a hard time bouncing back. The Dow Jones industrial average sank nearly 680 points today to the lowest level in five years.

Libor’s sharp jump over the past month is worrisome because consumer loans such as adjustable-rate mortgages are tied to Libor — meaning that those mortgages could become harder to pay. Citigroup analysts recently predicted that continued stress in Libor will result in a 10 percent jump in defaults for outstanding non-delinquent adjustable-rate mortgages when they reset.

Libor for overnight dollar loans slipped to 5.09 percent today from 5.38 percent, but still remains extremely high — especially compared with the target Fed funds rate, a key overnight lending rate that the Federal Reserve slashed Wednesday by a half-point to 1.5 percent.

Meanwhile, commercial paper outstanding dropped for the fourth straight week. Commercial paper is a type of debt companies sell to get short-term cash, often so that they can maintain their inventories and payrolls. The Fed 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 billion on Sept. 10, and down 30 percent from the peak of $2.2 trillion in the summer of 2007.

As companies have a harder time getting financing, businesses and municipalities have been taking action to try to adapt. Connecticut’s governor is requesting that banks statewide contribute at least $1 million each to a lending pool for small businesses. And Apollo Management is offering a $540 million capital infusion to its affiliate Hexion Specialty Chemicals to help Hexion close its takeover of Huntsman; Hexion said it doubted that Deutsche Bank and Credit Suisse Group would provide financing.

Automakers and dealers have been especially hard hit by the double-whammy of a slow economy and squeezed credit. Standard & Poor’s Ratings Services today put General Motors and its 49 percent-owned finance affiliate GMAC on negative credit watch. It also put Ford on negative credit watch. That means there is a 50 percent chance that S&P will lower the ratings on these companies in the next three months; S&P said that while their liquidity is adequate now, deteriorating conditions could challenge their liquidity in 2009.

There were a few promising signs that the stranglehold on the credit markets is starting to loosen, at least in some areas.

One was that the recent drop in commercial paper was smaller than the $94.9 billion decline in the previous week, and the $61 billion decrease in the week ended Sept. 24. And last week’s decline occurred in financial companies’ commercial paper and asset-backed commercial paper — commercial paper issued by nonfinancial companies edged higher overall.

Moreover, following the Fed’s Tuesday decision to buy commercial paper and Wednesday’s move to slash the key interest rate, the rates on certain overnight commercial paper fell by 1.15 percentage points on Thursday to 2.35 percent, noted Miller Tabak analyst Tony Crescenzi.

But investors are still anxious. The yield on the three-month Treasury bill initially edged up today, but then slipped to 0.51 percent from 0.63 percent late Wednesday. That suggests that demand for T-bills, regarded by investors as the safest assets around, remains high.

Longer-term Treasury yields were mixed after the stock market’s plunge.

In late trading, the 2-year Treasury note rose 1/32 to 100 28/32 and yielded 1.55 percent, down from 1.56 percent late Wednesday. The 10-year note fell 28/32 to 101 30/32 and yielded 3.76 percent, up from 3.65 percent. The 30-year bond fell 1 25/32 to 106 31/32 and yielded 4.09 percent, up from 4.05 percent.