Short-term debt market contracts
The amount of U.S. commercial paper outstanding had its biggest weekly drop since the Sept. 11, 2001, terror attacks as some investors stepped back from the short-term debt market in continuing fallout from the U.S. sub-prime mortgage meltdown.
In Canada, major banks threw their support Thursday behind a pact aimed at easing a credit crunch in a part of the country’s asset-backed commercial paper market. The banks said they would still fund their own, larger part of the market.
The amount of U.S. commercial paper outstanding dropped $91.1 billion, or 4.1%, to a seasonally adjusted $2.13 trillion as of Wednesday, according to the Federal Reserve. It’s the biggest decline since the week ended Sept. 12, 2001.
U.S. commercial paper, which reached a record $2.22 trillion outstanding July 25, has a maximum maturity of 270 days and is commonly bought by money-market mutual funds. Issuers of asset-backed commercial paper use the proceeds to make or buy mortgages or to acquire other assets.
The decline in the latest weekly period was driven by a 4.3% fall in asset-backed commercial paper, which represents about half the commercial paper market and has been used to finance purchases of sub-prime mortgages.
Meanwhile, the average yield on 30-day asset-backed commercial paper with an A1 credit rating, the second-highest short-term rating by Standard & Poor’s, has risen since Aug. 3 by 0.43 of a percentage point to 5.75%, the highest in six years.
The drop in the amount of paper outstanding shows that “issuers are being forced to make orderly exits from the commercial paper market and obtain financing elsewhere,” Tony Crescenzi, chief bond market strategist at New York-based Miller Tabak & Co., wrote in a note Thursday.
The accord in Canada might lift a money-market freeze there sparked by the sub-prime home-loan woes in the U.S.
Commercial paper trusts in Canada have been unable to sell debt coming due this week.
Under the agreement, commercial paper will be converted to floating-rate notes with maturities linked to the underlying assets, such as mortgages and corporate loans. The notes may carry maturities as long as 10 years. Commercial paper in Canada typically matures in one to three months.
Pension funds that hold commercial paper agreed to roll over any that matures in the next 60 days to allow the restructuring to be carried out.
About 23 commercial paper trusts will be supported, including at least seven run by Coventree Inc., Canada’s biggest issuer of nonbank asset-backed commercial paper.
