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 are hardly back to normal.

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

While investors don't appear to be in the same frenzy they were in 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 Ms 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,' Ms 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 per cent from 4.52 per cent on Wednesday.

Just a month ago, three-month LIBOR was at 2.81 per cent.

The 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 per cent jump in defaults for outstanding non-deliquent adjustable-rate mortgages when they reset.

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

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 US$56.4 billion (S$83.4 billion) to a seasonally-adjusted US$1.55 trillion in the week ended Oct 8 - that's down from US$1.82 trillion on Sept 10, and down 30 per cent from the peak of US$2.2 trillion in the summer of 2007.

There were some promising signs, however, 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 US$94.9 billion decline in the previous week, and the US$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 non-financial 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 per cent, noted Miller Tabak & Co analyst Tony Crescenzi.

And the yield on the three-month Treasury bill edged up to 0.67 per cent from 0.63 per cent on late Tuesday. That suggests a slight let-up in demand for T-bills, regarded by investors as the safest assets around.

Longer-term Treasury yields also rose, while the Dow Jones industrial average wavered in early afternoon trading.

The 2-year Treasury note fell 9/32 to 100 18/32 and yielded 1.71 per cent, up from 1.56 per cent on late Wednesday. The 10-year note fell 1 4/32 to 101 22/32 and yielded 3.79 per cent, up from 3.65 per cent.

The 30-year bond fell 1 30/32 to 106 25/32 and yielded 4.10 per cent, up from 4.05 per cent. -- AP