Lending rates fall but challenges remain

Lending rates mostly fell Monday as banks welcomed government aid, but financial institutions remained wary as the global economy continues to struggle.

U.S. Treasury prices were lower ahead of auctions and stocks appeared headed for an upbeat opening.

The 3-month Libor rate fell to 2.24% from 2.29% Friday, according to Bloomberg.com. The overnight Libor rate edged higher to 0.35% from 0.33%.

Libor, the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend dollars in the U.K. and is a key barometer of liquidity in the credit market.

Both the 3-month and overnight rates have fallen significantly since hitting record highs during the height of the credit crisis.

The overnight Libor rate has been hovering near its all-time low of 0.32% after falling from a high of 6.87% on Sept. 30. The three-month Libor rate has come down 2.58 percentage points since its October high of 4.82%.

The declines came after the U.S. government launched a number of programs aimed at easing funding concerns for banks and encouraging lending between financial institutions have also helped lower Libor rates. Such initiatives include lowering interest rates, injecting capital into banks and providing insurance on all non-interest bearing accounts.

But ongoing economic challenges appear to be tempering the effects of improved lending conditions.

In a sign of the difficulties still facing the financial services industry, giant insurer American International Group got a $150 billion deal from the federal government Monday, as policymakers made significant changes to the terms of the company's original bailout.

While inter-bank lending conditions have improved, many economists say banks remain wary of lending to businesses and consumers as the outlook for global economic growth is cloudy.

Treasurys. Prices for ultra-safe U.S. government debt fell Monday as investors appeared upbeat about the restructured AIG plan and China's $586 billion economic stimulus package.

U.S. stock futures were higher about 1 hour before the opening bell. Asian markets rallied and major indexes in Europe were about 3% higher.

The benchmark 10-year note was down 14/32 to 101-7/32 and its yield rose to 3.85% from 3.78% on Friday. Bond prices and yields move in opposite directions.

The 2-year note slid 4/32 to 100-6/32 with a yield of 1.4%, up from 1.33%.

The 30-year bond fell 19/32 to 103-5/32 and yielded 4.31%, up from 4.24%.

Meanwhile, the Treasury Department is set to auction $25 billion in 3-year notes Monday. And on Wednesday, the government will auction $20 billion in 10-year notes.