Federal Reserve data released on Thursday shows no improvement in the commercial paper market.
In fact,the size of the outstanding market has shrunk to a record low:
Of course, a lot of this is down to alternative facilities, like the Commercial Paper Funding Facility, provided by the Fed. Companies are issuing directly to the Fed’s SPV instead of traditional counterparties like money market funds. This is especially the case since Fed terms allow issuers to finance the repurchase of outstanding commercial paper by selling new paper to the SPV.
As Dow Jones Newswires reports:
NEW YORK(Dow Jones)–The U.S. commercial paper market shrank to a record low in the week ended June 24, according to data released by the Federal Reserve Board on Thursday. The size of the market is now $1.155 trillion, the lowest since the central bank began recording this data in 2001. At its peak, the commercial paper market was $2.2 trillion in July 2007. In the week ended June 24, this market, tapped by companies to pay landlords and employees, shrank by $47.5 billion. The shrinking economy has translated into fewer spending needs.
Last week, the overall market shrank by $27.7 billion. Over the past 3 months, the commercial paper market has seen dramatic contractions. Demand for funds from companies has dropped, while the Federal Deposit Insurance Corp. program guaranteeing longer-term debt has provided some companies with a viable funding alternative. The bulk of the shrinkage this week is in the asset-backed portion of the market. It saw a decline of $21.3 billion this week, after a decline of $22.2 billion last week. The Fed set up the Commercial Paper Funding Facility in October to extend short-term financing to U.S. companies that had been shut out of the commercial paper market. Later Thursday, the bank will release data on how much it holds in its program.
The only thing is, the Fed’s June report on the uptake of its credit and liquidity programs contradicts the above line. It described a decline in the use of its Commercial Paper Funding Facility thus:
Recent Developments • A significant portion of maturing paper in the CPFF over recent weeks has not been rolled over. • Improvements in market conditions may have allowed some borrowers to obtain financing from private investors in the commercial paper market or from other sources.
So what does it mean if companies are not tapping either the market or the Fed for short-term liquidity?
Dow Jones suggests the shrinking economy has translated into fewer spending needs and lower overheads. But that would be extremely effective cost-cutting by companies. We, on the other hand, presume a shrinking economy can seriously hinder cashflow due to invoice payment delays, upping the need for accessibility to short-term cash.
Either way, the Fed is not planning to discontinue to its CP facilities just yet. As stated on Thursday, they will now run until at least February 1, 2010:
The Federal Reserve on Thursday announced extensions of and modifications to a number of its liquidity programs. Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time. As a consequence, to promote financial stability and support the flow of credit to households and businesses, the Federal Reserve is extending a number of facilities through early 2010. At the same time, in light of the improvement in financial conditions and reduced usage of some facilities, the Federal Reserve is trimming the size and changing the terms of some facilities.
Specifically, the Board of Governors approved extension through February 1, 2010, of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The expiration date for the Term Asset-Backed Securities Loan Facility (TALF) currently remains set at December 31, 2009. The Term Auction Facility (TAF) does not have a fixed expiration date.
Related links:
Libor is useless - FT Alphaville
US Commercial Paper Outstanding At Record Low Level - WSJ
