The commercial paper market contracted $40 billion for the week ended yesterday. Not only did the asset backed commercial paper market continue to shrink, but other commercial paper outstandings fell as well.
As we have noted before, the continued shrinkage of the CP market calls into question the strategy of using interest rate cuts to try to solve the credit crisis. Lower rates will not change investor worries about lack of adequate information about credit quality or counterparty risk.
The U.S. asset-backed commercial paper market had its biggest weekly drop in two months as $40 billion of mortgage-related writedowns by banks gave investors more reason to avoid buying the debt.
Debt maturing in 270 days or less and backed by mortgages, credit-card loans and other assets fell $29.5 billion, or 3.4 percent, to a seasonally adjusted $845.2 billion for the week ended yesterday, the Federal Reserve in Washington said today. The broader commercial paper market had its first contraction in six weeks, declining less than 1 percent.
Investors are shunning commercial paper that may be backed by the same type of subprime-mortgage securities responsible for writedowns at Citigroup Inc., Morgan Stanley, Merrill Lynch & Co. and other banks….
Asset-backed commercial paper “has become associated with credit risk,” Everett Rutan, the team leader for U.S. asset- backed commercial paper analysts at Moody’s Investors Service, said in a Nov. 6 interview at an industry conference in Orlando.
The market has fallen for 13 straight weeks, shrinking about 29 percent since reaching a peak of $1.18 trillion on Aug. 8. The broader commercial paper market declined $15.6 billion in the past week to $1.87 trillion, according to the Fed data..