Outstanding U.S. commercial paper fell 4.2 percent, the biggest weekly drop in at least seven years, as investors fled asset-backed debt and opted for the safety of Treasuries.
Short-term debt maturing in 270 days or less fell $90.2 billion to a seasonally adjusted $2.04 trillion in the week ended yesterday, according to the Federal Reserve. Commercial paper outstanding has fallen by $181.3 billion in two weeks.
The retreat may indicate that the Fed's decision to lower the discount rate last week failed to instill enough calm to draw back investors. Commercial paper backed by assets led the fall as buyers fled debt linked to subprime mortgages. Outstanding paper may slump by a total $300 billion, representing the entire amount of such debt backed by home loans, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.
``The commercial paper market, in terms of the asset-backed commercial paper market, is basically history,'' Bill Gross, manager of the world's biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., said in an interview today.
The decline in outstanding commercial paper was driven by a 6.8 percent fall in asset-backed commercial paper, which represents about half the commercial paper market and has been used to finance purchases of subprime mortgages.
Banks worldwide have $891 billion at risk because of credit agreements on asset-backed commercial paper programs, Fitch Ratings said today.
``There is no doubt that banks have been forced to assume additional liabilities,'' Gross said.
Rates Lowered
The most recent decline is the biggest by percentage since at least November 2000, according to data compiled by Bloomberg.
The Fed lowered the interest rate it charges to lend to banks to encourage buyers of commercial paper after the market seized up last week for Countrywide Financial Corp. and other mortgage lenders. Countrywide, based in Calabasas, California, borrowed its entire $11.5 billion in available bank credit lines in order to fund its operations.
Countrywide said yesterday that Bank of America Corp. agreed to provide $2 billion of new capital through the purchase of preferred securities.
Investors shunned commercial paper in favor of government debt, sending Treasury bill yields down earlier this week by the most since the stock market crash of 1987.
Cash in the System
``There is a significant amount of cash in the system, it's just not getting to the parts of the market that need it,'' Conrad DeQuadros, a senior economist at Bear Stearns Cos., said in an interview today in New York.
The average yield on 30-day asset-backed paper rated A1, the second-highest short-term credit rating by Standard & Poor's, rose 5 basis points, or 0.05 percentage point, to 6.1 percent today and has risen 35 basis points in the past week.
``The shrinkage of the commercial paper market will force companies to obtain money elsewhere,'' Crescenzi, who is based in New York, said in e-mailed comments today. ``Some will be unable to obtain funding and will shut or scale back their operations.''
More than half of the $1.1 trillion in outstanding asset- backed paper comes due in the next 90 days, according to the Federal Reserve. Unless they find new buyers, hundreds of hedge funds and home-loan companies will be forced to sell $75 billion of debt, according to Zurich-based UBS AG, Europe's largest bank.
Investor Losses
Those sales would drive down prices in a market where investors have already lost $57 billion, based on Merrill Lynch & Co.'s broadest index of floating-rate securities backed by home- equity loans. That may hurt the 38.4 million individual and institutional investors in money market funds, the biggest owners of commercial paper. Top-rated commercial paper is one of the world's safest assets.
In Europe, the asset-backed commercial paper market is almost closed, Reynold Leegerstee, team managing director for Moody's Investors Service, said on a conference call today.
Deutsche Bank AG and Commerzbank AG, the nation's two biggest lenders, as well as DZ Bank Group, Germany's biggest cooperative bank, and HVB Group, part of Unicredit SpA, may record reduced profit and revenue because of the U.S. subprime mortgage slump, Moody's said.
The possibility of any of the large European banks defaulting on commercial paper debt is remote, Moody's Vice Chairman Chris Mahoney said.
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