Fed Commercial Paper Program Raises Rather Than Lowers Borrowing Rates

We have written before how many of the various government interventions to try to produce specific outcomes in financial markets have either not proven very successful or produced adverse outcomes elsehwhere.

The latest example is the Fed’s new program by which it is buying commercial paper, a form of short-term corporate debt, directly from companies to lower their borrowing costs, which spiked up dramatically as many investors have shifted their short-term holdings to Treasuries or Treasury money market funds.

Today was the first day of the Fed’s new program, and in a ringing endorsement of the concept, interest rates on commercial paper increased.

From Bloomberg:

Yields on commercial paper rose as the Federal Reserve began buying the debt directly from companies, showing the central bank’s efforts to unfreeze short- term credit markets have yet to take hold.

Rates on the highest-ranked 30-day commercial paper, which many corporations use to finance their day-to-day operations, jumped 25 basis points to 2.88 percent, according to yields offered by companies and compiled by Bloomberg….

The market has shrunk by one-fifth since Sept. 10, its worst slump on record, as investors shunned the debt and companies sought alternative financing. Several dozen companies including General Electric Co., Morgan Stanley and American Express Co. have registered to be in the Fed’s program…

The Fed today set the rate it’s willing to accept for 90-day unsecured commercial paper at 1.88 percent plus a 1 percentage point credit surcharge. The 90-day secured asset-backed rate was set at 3.88 percent, according to Fed data compiled by Bloomberg.

That compares quoted rates of 3.19 percent for the asset- backed commercial paper of the highest-ranked companies and 3.79 percent for companies one grade lower, Bloomberg data show. The rates are set under the Fed’s Commercial Paper Funding Facility and are available on CPFF.

Yields on 30-day paper plunged to a four-year low of 1.92 percent last week after earlier reaching a nine-month high of 4.28 percent, Bloomberg data show. At 2.88 percent, the debt still yields 1.38 percentage points more than the Fed’s target lending rate. Before the seizure, the rates were about the same.

Rates on paper due in 90 days rose 2 basis points to 3.34 percent, Bloomberg data show.

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16 comments

  1. S

    pimco idiot bill gross on tv saying this will definitly drive libor down as the pure arb is too easyy. He made no mention of why this has not happened in agency paper.

  2. RBG

    Yves,
    The title implies that the rates rised because of Fed program. Is it really so? If so, why?

    Also, can you help me with some basic questions I have?

    Is the Bloomberg news saying that the market rate is 3.19% for 90-day asset backed CP issued by the highest grade corporates, but the Fed is charging 3.88%??? (I assume GE, MS, and AMex are still one of the highest grade companies?)

    Also, is Bloomberg saying that Fed charges lower for unsecured CP (2.88% = 1.88%+1%) than those backed by asset (3.88%)???

    Thanks!

  3. Anonymous

    why would the Fed buying high quality CP lower rates?

    Lets say CP is an asset class. If someone comes in and buys all the quality stuff, I would have to demand a higher rate for what’s left in the pool. Not less…

  4. Matt Dubuque

    There are many cross currents at play here. CP rates were highly likely to be higher today for a variety of reasons.

    I’m very reluctant to jump to a post hoc ergo propter hoc analysis on just one day’s worth of data.

    For example, GE, which is heavy in the CP market, is substantially up today, which COULD be linked to this.

    My view: Too soon to tell. WAY too much going on to establish cause and effect so soon.

    Matt

  5. Max

    Mike Shedlock has a theory that since the Fed is trying to force the markets’ hand to unfreeze the CP market by opening its own CP lending facilities, it has essentially driven banks out of the CP business, and has became the lender of only resort.

  6. wintermute

    Mike Shedlock has also pointed out that the Bloomberg reporter completely missed the subtext of the GE recourse to Fed CP facility.
    GE is clearly having cashflow/rollover problems.
    I guess that their media (spindoctors) put out the press release in a way that made it look as positive as possible and BB swallowed it whole. Thank goodness we have people like Mike and Yves to call out failure and propandanda when they see it being sold to the public as a “solution”

  7. Viv

    Just taking a look at GE’s balance sheet, it has 548 Billion dollars in both short and long term debt combined!!

    GE needs the FED waaaay more than the FED needs GE’s “support”

  8. Yawner

    wintermute,

    I think this an issue where Shedlock does not have it right- GE has been rolling paper for the past month and rates had come started to come back in even before the CP program was announced. It’s a good conspiracy theory but not much more.

    viv- a lot of that debt is equipment that GE Industrial has sold to good buyers. You can’t get a conclusion just by looking at a couple of numbers.

  9. Yawner

    viv- I actually just read Shedlock’s post. While I like his stuff, since I follow GE closely as a buy-side analyst, it’s clear he has spent maybe 30 seconds looking at their financials and has not spent any time with their SEC filings, or in familiarizing himself with their recent moves. Mish should stick to the bigger-picture macro stuff because posts like that, on an individual company where he clearly doesn’t know the details, don’t help his credibility.

  10. tompain

    I second Yawner’s comments about Mish’s knowledge of specific companies. He often does not know what he is talking about.

  11. Jed

    Pimco’s Gross assured viewers this AM (Oct 27) that 3 month Libor would fall to 2.88 or less by Tuesday, October 28.

    Pimco has been a huge beneficiary on both sides of this crisis e.g. the Fannie Freddie bailout and now running the CPFF.

    Gross on Libor falling due to CPFF

  12. Anonymous

    Please. I sometimes find Mish insightful in spite of himself. But really, the only reason to click over to his site is for entertainment value. He actually writes quite well and has a pretty consistent point of view. In depth analysis? Well…

  13. Citizen Clyde

    Hey buy-side analyst,

    The only thing working is the macro short thesis, individual metrics are getting swamped by second order effects.

    The buy-side has been pathetic for a decade, and you are calling out Mish? Hahahahahahahahahha, I am laughing all the way to the bank at your incompetence.

  14. fresnodan

    what I can’t help but wonder is how “solid” GE really is – isn’t it really just another company that makes most of its profits through finance? If 5 “investment” banks went belly up, isn’t it entirely rational to presume there may be financial instruments that GE owns that could be devastating to its balance sheet?

  15. Anonymous

    I think perhaps the point of the story is subtle. The government starts buying up 90 day commercial paper which helps financial institutions (GE capital and insurers) to lend out at lower rates. Meanwhile industry which tends to sell 30 day commercial paper is having difficulty finding buyers for its debt.
    The FED thinking is possibly that if it buys enough 90 day debt then financial institutions will start to buy the shorter term 30 day commercial paper and convert it into 90 day debt it can sell to the FED. Unfortunately it appears to be a bit of a black hole as far as the financial institution debt is concerned. Not only is the lending not being passed on it is distorting the debt markets in a way which could damage the rest of the economy.

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