Commercial paper yields take a dive

In a sign that the credit crunch could be easing, overnight yields on U.S. asset-backed commercial paper -- a type of short-term IOU -- fell Wednesday by the most in almost three years.

Overnight top-rated commercial paper, rated A1+ by Standard & Poor’s and P1 by Moody’s Investors Service, yielded an annualized 5.9%, down 0.2 point from Tuesday, according to Bloomberg News data.

Asset-backed commercial paper is short-term debt used to fund purchases of longer-term securities, such as mortgage-backed bonds. Banks have been among the main issuers of this type of commercial paper.

Investors have demanded sharply higher yields on those IOUs since July because of concerns about the quality of the assets backing the debt.

On Wednesday, Moody’s said in a conference call with investors that the ratings outlook for banks’ asset-backed investment pools would remain stable, and that banks generally should be able to “ride out” the recent disruption in credit markets.

“As time goes on, the sensationalism dies down and liquidity comes back,” said Denise Latchford, director of $8 billion in money-market funds for American Century Investments.

“Conditions have improved,” said Alex Roever, short-term debt strategist at JPMorgan Chase & Co. “Investors are more comfortable putting money back to work and at longer maturities.”

Many investors also are anticipating that the Federal Reserve will help bolster confidence in the market by cutting its benchmark interest rate when policymakers meet Tuesday.