Commercial Paper Slump Deepens, T-Bill Yields Fall

Includes: AGG, DIA, SPY
by: Judith Levy

The U.S. commercial paper market contracted for the third week in a row -- its worst slump in at least seven years -- and has shed 11% of its value in a month as investors continue to flee to safe investments. Outstanding commercial paper fell a seasonally adjusted $62.8 billion over the past week. That fall is smaller than that of the previous week, when paper dropped by $90.2 billion, but is still significant. Total outstanding commercial paper now stands at $1.979 trillion, the first time in five months it has ticked below $2 trillion. Asset-backed commercial paper fell $59.4 billion to $998 billion in the past week, its lowest since December. On August 17, the Fed reduced the discount rate to lure investors back to the market, but they remain reluctant to buy short-term debt backed by mortgage assets. "I don't think the Fed understands how critical the situation is,'' said Neal Neilinger, co-founder of NSM Capital Management. "The market is going to overshoot itself and not lend money to people who deserve it." An $18 billion auction Thursday for two-year U.S. government debt drew the most demand in fifteen years. The yield on the three-month T-bill, which fell 21 basis points Thursday to 3.80%, has fallen 114 basis points since August 8. The average yield on the highest-rated asset-backed commercial paper with one-day maturity, on the other hand, rose 11 basis points to 6.15%, its highest since 2001.

Sources: Bloomberg I, II, Reuters
Commentary: Bernanke Challenges Investor Perceptions -- WSJFed Weighed Policy Action Ten Days Prior to Rate CutIn the Federal Reserve We Trust?
Stocks/ETFs to watch: DIA, SPY, AGG

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