Short-term debt yields soar despite rate cut

Asset-backed commercial paper yields soared Friday despite the Federal Reserve’s effort to calm financial markets by cutting its discount rate.

Top-rated asset-backed commercial paper maturing Aug. 20 yielded 5.99%, up 0.39 of a percentage point since Thursday. It was the biggest increase since yields rose 0.39 of a point after the Sept. 11, 2001, attacks.

Commercial paper is bought by money market mutual funds. Borrowers use the proceeds of asset-backed commercial paper to buy mortgages, bonds and other assets.

Issuers are offering the highest rates in almost seven years to entice lenders scared off by losses on securities backed by sub-prime mortgages.

The Fed’s action “may help add confidence that action will be taken when it’s necessary, but further action is needed to actually offset the credit contraction we have had,” said Ashish Shah, global head of credit strategy at Lehman Bros. Holdings Inc. He added that the Fed’s move was good but “doesn’t actually add any liquidity into the system. It’s more of a confidence booster.”

Tony Crescenzi, chief bond market strategist for New York-based Miller Tabak & Co., said the Fed’s action should help.

“Confidence equals liquidity,” Crescenzi said. “With the Fed supplying credit, fears should subside and help to open the credit spigot again.”