Start the conversation
From Staff Reports
The level of outstanding commercial paper underwent its biggest weekly drop in at least seven years in the period that ended Wednesday, further evidence of how the credit crunch has shaken the financial markets.
Commercial paper is a highly flexible, unsecured, short-term loan obligation with a maturity term that typically ranges between two and 270 days. Often issued directly by a bank or company without using a broker, commercial paper enables a firm to finance its day-to-day operations and capital needs without having to worry about the natural ebb-and-flow of outstanding revenue, loans, or cash flow. But companies can fall into a liquidity crisis when a crisis of confidence makes it impossible for them to issue this kind of very short-term debt – and can even force a company to seek shelter in the bankruptcy courts.
Indeed, Tony Crescenzi, chief bond strategist for Miller Tabak & Co., described it for MarketWatch as a market “that has shown virtually no tolerance for bad credit or risky entities for more than 30 years.”
In a market note to clients, Crescenzi said the commercial paper market could shrink by as much as $300 billion – equal to the amount of commercial paper backed by mortgage loans. If that happens, it “absolutely will have a negative effect on the economy, arguably in need of offset by new liquidity from the Federal Reserve.”
But Alan Mulally, CEO of Ford Motor Co. (NYSE: F), told the Dow Jones news service this week that he doesn’t think that will be enough. He’s essentially now backing a call by Bob Nardelli – the newly appointed head of Chrysler Corp. – to stop worrying about inflation and start worrying about a recession. The bottom line: Cut interest rates.
. Asked whether he agreed with Nardelli’s call for a short-term interest-rate cut, Ford’s Mulally said this quickly widening confidence chasm was turning this from a watch for inflation into a wave of worry about a major economic downturn.
"It is a really important job to manage inflation and economic growth [but] focusing on economic growth appears to be a really important priority now," Mulally said. Everyone is right now worried about the “macro economy…especially right now in the U.S. [market] with subprime [worries] and [higher] fuel prices,” he said. “Our business is really dependent on consumer confidence.”
The Ford chief’s comments are just the latest evidence that Corporate America and much of mainstream America is starting to think that the Federal Reserve is focusing on the wrong battlefront, and that it’s allowing the housing and credit crises to spread, almost unchecked. The commercial paper market is voting the same way, it appears.
Outstanding commercial paper dropped $90.2 billion this past week after plummeting $91.1 billion the week previous, according to the U.S Federal Reserve. Commercial paper has fallen a total $181.3 billion in the past two weeks, and $144.4 billion so far this month. In the week that ended Wednesday, asset-backed commercial paper fell by $77.1 billion, following a $48.4 billion drop.
According to debt-rating agency, Fitch Ratings, a total of $891 billion is at risk because of credit agreements on asset-backed commercial paper programs. The recent fall has been driven by a 6.8% decline in asset-backed commercial paper, which represents half the commercial paper market. Investors have abandoned commercial paper, and are seeking safer positions in the confines of government debt, which has pushed the Treasury bill yields down to near-historic lows.
The three-month T-bill yield has fallen well below 4.0%, and during an intra-week situation, fell below the 3.0% mark. On Monday, the yield on the three-month T-bill fell 66 basis points to 3.09%, after dropping 125 basis points earlier in the day – a greater plunge than during the October 1987 stock market crash. The yield on the one-month Treasury bill fell 62 basis points to 2.33%, after being down 175 basis points.