US Comm Paper rate rise as the Fed starts to support

Nearly two weeks after the Federal Reserve announced it would step in to support commercial paper, investors are still uncertain whether it will be enough to jump-start the $1.45 trillion dollar debt market.

The Federal Reserve's facility, which becomes operational on Monday, Oct. 27, will allow highly rated companies to tap the government for three-month loans that are crucial to their daily operations. This is good news for cash-strapped companies that have been struggling for more than a month to find financing for longer than just one day.

Yields on commercial paper rose as the Federal Reserve began buying the debt directly from companies, showing the central bank's efforts to unfreeze short- term credit markets have yet to take hold.

Rates on the highest-ranked 30-day commercial paper, which many corporations use to finance their day-to-day operations, jumped 25 basis points to 2.88 percent, according to yields offered by companies and compiled by Bloomberg.

We'll see how rates react to this new facility.

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The Fed's facility is primarily aimed at financial companies, which have been hardest hit by the credit seizure. Financial companies are paying an average of 3.25 percent to issue 90-day paper as of Oct. 24, according to the Fed. That compares with 1.91 percent for non-financial borrowers.

The Fed on Oct. 21 committed to provide $540 billion in loans to relieve pressure on money-market funds, the biggest buyers of the debt, its third action to unfreeze the commercial paper market. The measure supplements the Fed's СPFF plan, which was first announced on Oct. 7.

American Express (AXP) registered to issue $14.7 billion of commercial paper to the Fed and may begin selling some as soon as this week, said Joanna Lambert, a spokeswoman for the company.


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Sources :

1. Bloomberg: U.S. Commercial Paper Rates Rise as Fed Starts Buying the Debt, October 27, 2008 12:14 EDT
2. The Wall Street Journal: Commercial Paper Market Looks to Fed for Healing, October 24, 2008 2:32 PM ET
3. Econompic Data: Commercial Paper Freeze Up, October 27, 2008

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