Two Bloomberg stories discussed the conflicting currents in the short term markets. First on the reduced expectations of a large Fed funds rate reductions:
Futures contracts on the Chicago Board of Trade indicated a 24 percent chance that policy makers will lower the 4.5 percent target rate for overnight lending between banks by a half- percentage point at their meeting Dec. 11, compared with a 36 percent likelihood yesterday. The odds of a quarter-point cut were 76 percent.
The second was on the increasing stress in the asset backed commercial paper market:
Yields on commercial paper backed by assets such as credit cards and mortgages rose at the fastest pace in at least a decade as investors retreated from buying debt that may contain subprime mortgage assets.
Yields on 30-day asset-backed commercial paper rose 91 basis points to 6.06 percent this week, or 82 basis points more than the one-month London interbank offered rate, the largest gap on record, according to data compiled by Bloomberg.
The increase “shows a severe condition,” Tony Crescenzi, chief bond market strategist in New York at Miller Tabak & Co., wrote in an e-mail message to clients today.
The rising yields come as banks and other companies seek buyers for the debt to buttress their cash before the end of the year. The surge may prompt the Federal Reserve to be more aggressive in cutting its target interest rate next week to help reduce the cost of borrowing, Crescenzi said.
“This is a top reason to expect aggressive action from the Fed, which has been unusually quiet amid these worsening conditions and the well-advertised problem related to year-end funding pressures,” he said. “At a minimum, a 50 basis-point cut in the discount rate should be expected, in order to put a cap on money market rates, or to at least attempt to put a cap on these rates.”….
Reserves are recorded on the last day of the quarter and banks often add cash toward the end of the quarter so it can be reflected on their balance sheet statements filed with regulators, according to Ken Kim, an economist at Stone & McCarthy Research Associates in Skillman, New Jersey.
The U.S. asset-backed commercial paper market fell the most in five weeks, during the seven days ended Dec. 5, extending a four-month slump, as investors shunned the debt.
Commercial paper, which matures in 270 days or less and is backed by mortgages, credit-card loans and other holdings, fell 2.8 percent, to a seasonally adjusted $801.2 billion, the Federal Reserve in Washington said yesterday.
The slide is prompted in part by the retreat by structured investment vehicles, which sell commercial paper to finance purchases of higher-yielding securities.