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Commercial Paper Extends Slump on Asset-Backed Woes
Posted by regli
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Commercial Paper Extends Slump on Asset-Backed Woes August 30, 2007 11:43AM |
Admin Registered: 3 years ago Posts: 4,338 |
Commercial Paper Extends Slump on Asset-Backed Woes
http://www.feedity.com/?http://www.bloomberg.com/
By Darrell Hassler
Aug. 30 (Bloomberg) -- The U.S. commercial paper market shrank for a third week, extending the biggest slump in at least seven years, as investors balked at buying short-term debt backed by mortgage assets.
Asset-backed commercial paper, which accounted for half the market, tumbled $59.4 billion to $998 billion in the week ended yesterday, the lowest since December, according to the Federal Reserve. Total short-term debt maturing in 270 days or less fell $62.8 billion to a seasonally adjusted $1.98 trillion.
Commercial paper outstanding has fallen $244.1 billion, or 11 percent, in the past three weeks, suggesting the Fed's Aug. 17 reduction in the discount rate has yet to entice buyers back into the market. More than 20 companies and funds including Cheyne Finance and Thornburg Mortgage Co. failed to sell new paper as investors fled to safer investments.
The Fed ``failed to bring money markets back to normal,'' John Lonski, chief economist at Moody's Investors Service in New York, said in an interview. ``Credit markets are obviously in need of a rate cut.''
The 11 percent decline over three weeks is the biggest since 2000, according to data compiled by Bloomberg. Commercial paper hasn't fallen for three straight weeks since February.
Commercial paper is bought by money market funds and mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables, as well as car loans. Some of the programs are backed by subprime loans. Subprime loans are issued to borrowers with poor credit or high debt.
`More Problematic'
About 26 percent of asset-backed commercial paper outstanding as of July was used to fund purchases of mortgage- related securities, according to Standard & Poor's. The yield on the highest rated asset-backed paper due in a month reached a six-year high today of 6.18 percent.
``As the assets fall in value because of the credit rout that we're in, that makes it even more problematic for these entities to issue more commercial paper,'' Peter Plaut, an analyst at New York-based hedge fund Sanno Point Capital, said in an interview yesterday.
The Fed lowered the interest rate it charges to lend to banks to encourage buyers of commercial paper after the market seized up for Thornburg, Countrywide Financial Corp. and other mortgage lenders.
In a sign that buyers are still favoring safer assets, an $18 billion auction yesterday for two-year U.S. government debt drew the most demand since 1992.
The sale drew $3.97 for every $1 sold, the most since at least 1992, according to Bloomberg data. For the past 12 sales, the bid-to-cover ratio has averaged $2.77.
Cheyne, Grampian
London-based Cheyne Capital Management Ltd., the hedge fund manager set up by former Morgan Stanley bankers Stuart Fiertz and Jonathan Lourie, said yesterday that a fund it manages has been selling investments to help repay commercial paper due through November. Cheyne Finance, a so-called structured investment vehicle, holds about $6 billion in commercial paper that is mainly tied to real estate.
Funds like Cheyne Finance typically sell commercial paper maturing in less than 270 days and use the proceeds to purchase bonds with longer maturities. The profit typically delivered from this strategy is being cut by rising yields.
HBOS Plc, the U.K.'s largest mortgage lender, said last week that it would repay about $35 billion of commercial paper owed by its Grampian Funding LLC unit as contagion from the subprime mortgage slump drove up the cost of borrowing.
Fed Rates
The Federal Reserve Bank of New York said last week that it is accepting ``investment quality'' asset-backed commercial paper as collateral for loans. The central bank cut the discount rate, or the interest rate it charges banks, by 0.5 percentage point on Aug. 17 to increase demand for securities.
Futures as of yesterday show traders see a 46 percent chance the Federal Reserve will cut its target rate for overnight lending between banks to 4.75 percent at its Sept. 18 meeting.
``We need to get the banks to start lending again,'' Plaut said. ``Once we see that, we'll start to see the positive impact on the financial markets.''
http://www.feedity.com/?http://www.bloomberg.com/
By Darrell Hassler
Aug. 30 (Bloomberg) -- The U.S. commercial paper market shrank for a third week, extending the biggest slump in at least seven years, as investors balked at buying short-term debt backed by mortgage assets.
Asset-backed commercial paper, which accounted for half the market, tumbled $59.4 billion to $998 billion in the week ended yesterday, the lowest since December, according to the Federal Reserve. Total short-term debt maturing in 270 days or less fell $62.8 billion to a seasonally adjusted $1.98 trillion.
Commercial paper outstanding has fallen $244.1 billion, or 11 percent, in the past three weeks, suggesting the Fed's Aug. 17 reduction in the discount rate has yet to entice buyers back into the market. More than 20 companies and funds including Cheyne Finance and Thornburg Mortgage Co. failed to sell new paper as investors fled to safer investments.
The Fed ``failed to bring money markets back to normal,'' John Lonski, chief economist at Moody's Investors Service in New York, said in an interview. ``Credit markets are obviously in need of a rate cut.''
The 11 percent decline over three weeks is the biggest since 2000, according to data compiled by Bloomberg. Commercial paper hasn't fallen for three straight weeks since February.
Commercial paper is bought by money market funds and mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables, as well as car loans. Some of the programs are backed by subprime loans. Subprime loans are issued to borrowers with poor credit or high debt.
`More Problematic'
About 26 percent of asset-backed commercial paper outstanding as of July was used to fund purchases of mortgage- related securities, according to Standard & Poor's. The yield on the highest rated asset-backed paper due in a month reached a six-year high today of 6.18 percent.
``As the assets fall in value because of the credit rout that we're in, that makes it even more problematic for these entities to issue more commercial paper,'' Peter Plaut, an analyst at New York-based hedge fund Sanno Point Capital, said in an interview yesterday.
The Fed lowered the interest rate it charges to lend to banks to encourage buyers of commercial paper after the market seized up for Thornburg, Countrywide Financial Corp. and other mortgage lenders.
In a sign that buyers are still favoring safer assets, an $18 billion auction yesterday for two-year U.S. government debt drew the most demand since 1992.
The sale drew $3.97 for every $1 sold, the most since at least 1992, according to Bloomberg data. For the past 12 sales, the bid-to-cover ratio has averaged $2.77.
Cheyne, Grampian
London-based Cheyne Capital Management Ltd., the hedge fund manager set up by former Morgan Stanley bankers Stuart Fiertz and Jonathan Lourie, said yesterday that a fund it manages has been selling investments to help repay commercial paper due through November. Cheyne Finance, a so-called structured investment vehicle, holds about $6 billion in commercial paper that is mainly tied to real estate.
Funds like Cheyne Finance typically sell commercial paper maturing in less than 270 days and use the proceeds to purchase bonds with longer maturities. The profit typically delivered from this strategy is being cut by rising yields.
HBOS Plc, the U.K.'s largest mortgage lender, said last week that it would repay about $35 billion of commercial paper owed by its Grampian Funding LLC unit as contagion from the subprime mortgage slump drove up the cost of borrowing.
Fed Rates
The Federal Reserve Bank of New York said last week that it is accepting ``investment quality'' asset-backed commercial paper as collateral for loans. The central bank cut the discount rate, or the interest rate it charges banks, by 0.5 percentage point on Aug. 17 to increase demand for securities.
Futures as of yesterday show traders see a 46 percent chance the Federal Reserve will cut its target rate for overnight lending between banks to 4.75 percent at its Sept. 18 meeting.
``We need to get the banks to start lending again,'' Plaut said. ``Once we see that, we'll start to see the positive impact on the financial markets.''
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