I'm glad that we are now in agreement that the market sets interest rates.
Me too. Now all we need to agree on is what factors the markets use to set rates:
1. Borrowers demand for money
2. Lenders supply of funds to loan
Also lenders willingness to take risks (short term holding cash at zero versus risk of default), lenders perception of future rates, borrowers perceptions, which leads to lenders and borrowers perceptions of being able to refinance at more favorable rates.
The spike up in spread in groanup's link came from a sudden unwillingess to loan at low rates. At the same time treasuries dropped in anticipation of future Fed rate cuts. Borrowers bid 3 month yields lower being fairly sure that they would refinance at yet lower rates in the future. The reserve banks were able to set lower rates since they could use those loans as collateral for even lower rate short term loans from the Fed. The low rates ripple out from there although unevenly with fluctuations.