Traders Cut Estimates of 50 Basis Point Rate Cut, But Asset Backed Commercial Paper Rates Rise

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.

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  1. Anonymous

    Re: For instance, Montana has about $525 million of its $2.3 billion fund invested in SIVs. Carroll South, executive director of Montana’s Board of Investments, said all but $90 million of its SIV investments are top-grade paper backed by major banks.

    His main worry isn’t losses, but that local agencies which make up a bulk of the cash pool begin to panic and withdraw money. Local governments, which under state law are guaranteed the ability to withdraw, have pulled out some $321 million already from the Montana fund.

    “These are buy and hold investments, they are held on the books until such point and time there’s a definite action that we won’t get all of our principal back,” he said.

    The losses, he said, come when fund participants begin to withdraw money to such an extent that the state is forced to sell assets at a discount. He took steps to prevent this since August by shortening the maturities on the fund’s investments to guarantee liquidity.

    My vote for defaults for next week goes to Ohio!


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    Re: (G) The treasurer of state and his bondsmen or surety are liable for the loss of any moneys of the state invested under this section through a pool established under division (A) of this section to the same extent the treasurer of state and his bondsmen or surety are liable for the loss of public moneys under section 135.19 of the Revised Code.

    Interim monies held by the School District can be deposited or invested in the following securities: 1. United States Treasury Notes, Bills, Bonds, or any other obligation or security issued by theUnited States Treasury, or any other obligation guaranteed as to payment of principal and interest by the United States; 2. Bonds, notes, debentures, or any other obligations or securities issued by any federal government agency or instrumentality, including, but not limited to, Federal National Mortgage Association, Federal Home Loan Bank, Federal Farm Credit Bank, Federal Home Loan Mortgage Corporation, Government National Mortgage Association, and Student LoanMarketing Association. All federal agency securities shall be direct issuances of federal government agencies or instrumentalities; 3. Written repurchase agreements in securities listed above; 4.Bonds and other obligations of the State of Ohio or Ohio local governments; 5.Time certificates of deposit or savings or deposit accounts including, but not limited to, passbook accounts; 6. No-load money market mutual funds consisting exclusively of obligations described indivision (1) or (2) and repurchase agreements secured by such obligations; 7.The State Treasurer’s investment pool (STAROhio); 8. Commercial paper and bankers acceptances if training requirements have been met

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