Saturday, January 31, 2009

Thaw Is Felt in Market for Commercial Paper

The credit market has always been a concern in dealing with the current financial crisis, but the market has been performing better over the past few months. After Lehman Brothers filed for bankruptcy, the market quite literally ground to a halt. The LIBOR rate rose to unprecedented levels, and thankfully, after moves by the Treasury, Fed, and UK, the market slowly started heading back in the right direction. if you remember, in previous posts by Joe, "Metamorphosis" and "Double, Double Toil and Trouble; Fire Burn and Cauldron Bubble", he wrote at length about the changes in the LIBOR rate.

There have been several articles written recently about the moves from U.S. Treasuries (many U.S. Treasury money market funds have closed in fact) to corporate bonds and in particular investment grade corporate bonds.

On Friday in The Wall Street Journal there was a good article pointing out the continuing movement to normalcy.

Thaw Is Felt in Market for Commercial Paper
January 30, 2009
By Liz Rappaport

A significant batch of companies that had turned to the Federal Reserve as a buyer of last resort for their commercial paper have likely moved back to private buyers, showing that the once-frozen market has thawed, but not completely.

The amount of three-month debt the Fed holds in its Commercial Paper Funding Facility fell by $102 billion in a week when about $230 billion of commercial paper the Fed owned was set to mature. That suggests some issuers likely returned to the open market.

The market for this three-month debt took the heavy new supply load in stride. While the Fed doesn't disclose whose debt it is buying, or delineate which purchases are new and which are refinancings, investors have kept a close eye this week on the commercial-paper market's reaction as a test of the Fed's efforts to restore credit markets to more-normal functioning.

"I believe the CP market has been stabilized, but it is not back to full health," says Joseph Abate, money market strategist at Barclays Capital.

Still, many issuers did resell their debt back to the Fed for another three months of financing, even though the Fed charges them higher interest rates than others pay in the open market, say traders. Meanwhile, a few have found alternatives to the market and the Fed, by turning to other, cheaper debt venues such as issuing certificates of deposit or Yankee CDs, or other shorter-term debt, say traders.

The total outstanding amount of short-term debt in the commercial-paper market fell by $86.8 billion in the week ended Wednesday -- the third straight week of decline, according to Fed data. The debt sold by financial companies fell substantially, by $93.5 billion.

The deluge of supply maturing this week didn't alter rates, a mark of strength for the market, say analysts. The Fed is buying commercial paper at rates of 1.2% to 3.2%, while borrowers with access to the open market are borrowing for three months at rates ranging from 0.4% to a little more than 2%, according to Fed data.

Money market fund managers, which buy commercial paper, still are wary of foreign bank debt, say traders and analysts, but these borrowers rely heavily on the market to borrow much-needed U.S. dollars. So these banks ended up rolling over their debt with the Fed, says one trading desk head.

Source: The Wall Street Journal

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