One day after the Treasury Department's announcement that it will not purchase troubled assets from firms, opting in favour of equity injections instead, overnight lending rates in the United States are higher on Thursday morning.

According to the British Banker's Association, the overnight USD LIBOR rose to 0.40% from 0.3825% on Wednesday and the three-month LIBOR is up from 2.14875% from 2.1325%. The data also marks the first increase in three-month inter-bank lending rates which have been declining since Oct. 27.

As a consequence, the Libor-OIS spread widened 4 bps to 162 bps and the TED spread rose 1 bps to 200 bps.

The overnight rate nevertheless remains below the Fed's 0.50% target.

The news comes one day after U.S. Treasury Secretary Henry Paulson said the original idea behind the $700 billion rescue package is no longer an effective use of the allocated funds. That approach has been abandoned in favour of the Capital Purchase Plan, which is already directing liquidity into financial firms, he announced Wednesday.

Paulson said that when he originally asked for $700 billion to rescue the financial sector by purchasing illiquid assets from financial firms, he considered such an approach "the most effective means of getting credit flowing again." During two weeks of deliberating with Congress, however, market conditions deteriorated "considerably," and he realized that a more timely approach would be necessary.

By Erik Kevin Franco
©CEP News Ltd. 2008