Commercial paper rises for first time in 7 weeks

By: AP
By: AP

NEW YORK (AP) -- The market for the short-term debt known as commercial paper rose last week - a good sign for companies worried about having to refinance at the end of the year, when investors are loath to add risk to their balance sheets.

The Federal Reserve said Thursday that commercial paper in the market increased over the past week for the first time since the collapse of Lehman Brothers Holdings Inc. The reversal arrived amid Monday's launch of the Fed's program to buy highly rated commercial paper with a three-month maturity.

Commercial paper consists of short-term, unsecured loans companies get to finance their day-to-day operations. Normally, the most common buyers of commercial paper are money market funds, but many of them stopped buying the debt when Lehman went bankrupt.

Commercial paper outstanding rose by $100.5 billion to a seasonally adjusted $1.55 trillion in the week ended Wednesday. The big increases have been in the commercial paper issued by financial companies and in the paper backed by assets such as mortgages.

"This is good news for issuers, as it will relieve strains associated with having to issue more frequently," wrote analyst Tony Crescenzi in a note. "Issuers are now 'locked in' to funding and can go about the normal functioning of their businesses without having the burden of corporate finance hanging over their heads."

However, the road to recovery for the broader credit markets is expected to be a long one. The Fed might be providing a prop to certain corners of the market, but overall, market participants are still taking on very little risk.

"The repo market is profoundly broken, again," said T.J. Marta, fixed-income analyst at RBC Capital Markets. "Short-term rates are so low that it no longer makes any sense to lend money on a short-term basis."

The repo, or repurchase, markets are where banks and other financial firms make and receive short-term loans backed by collateral, usually Treasury bills. A freeze in the repo markets is problematic for banks, and potentially devastating for hedge funds, which don't have as much cash on hand as banks do.

Meanwhile, investors are still keeping a large amount of money in Treasury bills. The three-month T-bill, seen as one of the safest assets available, saw its yield slip to 0.46 percent from 0.58 percent late Wednesday. A drop in yield indicates a rise in demand, but is also affected by rate cuts. On Wednesday, the Fed lowered its target for the fed funds rate - a key lending rate - by a half-point to 1 percent.

The three-month dollar London Interbank Offered Rate, or Libor, sank to 3.19 percent Thursday after the Fed's rate cut from 3.42 percent Wednesday. Libor is an important interbank lending rate that affects many consumer loans, including adjustable-rate mortgages. About two weeks ago, three-month dollar Libor was as high as 4.82 percent.

Investors sold some of their longer-term Treasury holdings after the Commerce Department reported a narrower-than-expected 0.3 percent decline in third-quarter gross domestic product.

But the selloff was modest, given the grim news that the report revealed. Americans' disposable income dropped at an annual rate of 8.7 percent in the third quarter - the biggest quarterly drop since records began in 1947. Businesses also pared back spending sharply, and export growth slowed.

The factor keeping the GDP figure from coming in as low as expectations was a rise in inventories, noted Marta, saying that an inventory increase is actually a negative sign that businesses are unable to sell their goods.

The 2-year note fell 2/32 to 99 27/32 and yielded 1.58 percent, up from 1.55 percent late Wednesday. The 10-year note fell 15/32 at 100 20/32 and yielded 3.92 percent, up from 3.86 percent. The 30-year bond slipped 9/32 to 104 3/32 and yielded 4.26 percent, up from 4.24 percent.

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