BL: Asset-Backed Commercial Paper Drops for 10th Week (Update3)
By Bryan Keogh
Oct. 18 (Bloomberg) -- U.S. asset-backed commercial paper shrank for the 10th straight week, extending the worst slump in seven years and underscoring the depth of Treasury Secretary Henry Paulson's challenge to revive the market.
The short-term debt maturing in 270 days or less fell $11 billion in the week ended yesterday to a seasonally adjusted $888 billion, according to the Federal Reserve in Washington. The broader commercial paper market was little changed at $1.87 trillion.
Paulson is attempting to break a logjam in short-term debt with an $80 billion fund to resuscitate the market. Investors fled asset-backed securities on concerns they may contain subprime mortgages. The retreat left some companies unable to roll over their commercial paper, forcing them to sell assets.
The market is ``separating the wheat from the chaff,'' said Jill King, senior portfolio manager of Chicago-based Horizon Cash Management. ``The chaff can't roll right now.''
Businesses rely on commercial paper, usually maturing in three months or less, for expenses including payroll and rent. Among them are structured investment vehicles, or SIVs, such as those run by hedge funds Cheyne Capital Management Ltd. in London and TPG-Axon Capital Management LP in New York. The SIVs sell commercial paper to fund purchases of other securities such as finance company bonds and mortgage securities.
Fed's Rate Cut
Asset-backed commercial paper outstanding has tumbled 25 percent since the week ended Aug. 8, according to Fed data, and is at the lowest since April 19.
While asset-backed commercial paper shrank, the broader commercial paper market has climbed for the past three weeks, rising $1.3 billion in the most recent period, buoyed by the Fed's half-percentage-point cut of its benchmark interest rate Sept. 18. The move helped allay concerns that losses sparked by defaults on subprime mortgages may spread further into credit markets. Subprime loans are made to borrowers with poor credit.
This week's change in commercial paper is a ``rounding error,'' said Bruce Bent, who manages about $63 billion in assets as chief executive officer of The Reserve in New York, which created the first money-market fund in 1970.
The new fund from Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. is intended to buy assets from SIVs, helping them avoid dumping their $320 billion in holdings and further roiling the credit markets.
`Reignited Fears'
The announcement of the fund on Oct. 15 ``reignited fears about the asset-backed sector'' and may only delay marking down the assets in the SIVs, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.
``The real issue is this might prolong the inevitable which is eventually financial entities will have to mark to market their assets,'' he said. ``Assets that right now have a market value much lower than is being placed on the books.''
The drop in asset-backed commercial paper was the biggest since Sept. 26, Bloomberg data show. The debt fell $6.8 billion last week. All commercial paper outstanding rose $4.9 billion last week and $4.5 billion in the prior period, the first increase in eight weeks.
The gap between the yield on asset-backed commercial paper and the Fed funds rate signals investors still have concerns about the short-term debt.
Issuers of one-day asset-backed commercial paper are paying about 5.12 percent, or 37 basis points, more than the Fed's funds rate, compared with a one-year average of about 21 basis point more, Bloomberg data show.
Overnight asset-backed commercial paper yields widened to as much as 93 basis points more than the Fed's target rate for overnight loans between banks on Aug. 31, according to data compiled by Bloomberg.
-- With reporting by Caroline Salas and Mark Pittman in New York. Editor: A. Goldstein (ekm)
To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net
Last Updated: October 18, 2007 11:50 EDT
Market Data 
Markets 
AI
