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Commercial Paper

August 4, 2009


The size of the market for commercial paper in the U.S. has fallen dramatically since its peak in July 2007. After the disruptions of the Asset-Backed Commercial Paper (ABCP) crisis in August 2007 and the Lehman bankruptcy, the Federal Reserve created a commercial paper funding facility to restore liquidity. However the market for commercial paper has continued to shrink in 2009 straining financial intermediaries who have relied on the market for funding.

FRB: Commercial Paper
Reuters: U.S. Commercial Paper
WSJ: Commercial Paper Outstanding
Keogh, Condon: Commercial Paper Falls Most Ever

Post a Comment 9 Comments

  • Posted by Rien Huizer

    Is this where Brad’s shoes will rest in the process of filling?

    Cheers, I had not seen this before

  • Posted by geographics

    We’ll do our best!

  • Posted by Pax Americana

    will be tracking this Geoeconomics section henceforth, wish you good luck and Brad!

  • Posted by Ron Levin

    But then why are interest rates climbing?

  • Posted by geographics

    I am going to guess you mean the forward short rates which are much more tied to Fed expectations than anything else. With regards to CP, the rates have come down a lot ( but that relates to Fed interventions and the market settling down. Now I think the root of your comment is the question why if the demand is going down are rates not (guess a little bit here)? First the outstanding stock is the result of the supply and demand relationship (across time) not just the current demand component (the change in stock is also the cross of those forces). In short what happened was that the suppliers (the credit providers) didn’t want to extend credit via the CP market anymore and tried to pull that credit; intuitions that depended on CP for liquidity struggled as a result (and rates spikes). Although the CP market has had problems in the past (Penn Central) one wonders if institutions will be comfortable with the trade off of taking lower cost of funds but with the risk of a funding crisis going forward. What I mean by this is the unwinding in the CP market will now be driven by both suppliers and demanderS of credit.

    The main point of the chart was that as long as a source of funding (CP) is being wound down it is more likely than it otherwise would be that someone is under pressure (because they either have to shrink their balance sheets or find new funding).

  • Posted by Sage Sweetwood

    So commercial paper is back to a level that was typical from 2003-2004. One could speculate the the 2005-07 run up was the ‘loose money’ aberration, and now we are back to normal. Any thoughts??

  • Posted by geographics

    The run up was in some sense connected to easy credit and willingness to use financial engineering to create new financial products (via funding in the CP market) and that is likely to completely go away. I suspect that that the appetite for CP from traditional sources will not be the same after this crisis. The incremental value of funding through CP must be traded off against the risk of using short term funding (the risk that it can go away suddenly). It seems plausible to me that the perceptions about this trade off have changed, even for traditional borrowers, and that the old level is no longer ‘normal’.
    Note: The level of CP should be thought of as a % of something like GDP or the size of funding so that the changes are ‘real’ and not nominal.

  • Posted by Simon Smelt

    The continuing downward path could be the reciprocal of the huge build up of agency paper held by the Federal Reserve. If those Fed holdings are not counted as “commercial paper outstanding”, then what is happening is a sweeping of rubbish out of the market by the Fed.

    Hence, in itself, the decline to 2004/05 levels would then be a good thing. Trouble is the Fed has swapped US$ in exchange for the trash and, one suspects, not at market prices.

  • Posted by geographics

    The Fed agency holding would not be considered commercial paper. That said any connection is very indirect. I suspect the fed purchases of agencies have helped liquidity and stability in the markets and possibly help improve function in the CP market. It is not that the Fed purchases shrunk the CP market. The CP collapsed in late summer of 2008. The Feds actions kept it together (read larger than it otherwise would have been). A more direct comparison is the Fed’s Commercial Paper Funding Facility where they have purchased paper directly. These actions prevented an even worse collapse.

    I think the best way to think about the CP collapse is from the funding perspective. When this source of funding started to exit, because of concerns about the quality of the assets, those who relied on that funding came under pressure and hard to sell assets or find another source of funding.

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