U.S. Commercial Paper Soars Most on Record as Fed Becomes Buyer

Corporate borrowing in the commercial
paper market soared the most on record after the Federal Reserve
began buying the debt directly from issuers.
U.S. commercial paper outstanding rose by $100.5 billion, or
6.9 percent, to a seasonally adjusted $1.55 trillion for the week
ended Oct. 29, the Fed said today in Washington. It was the first
gain in seven weeks, reversing a 20 percent decline during the
previous six weeks. Financial paper led this week's gain, rising
$69.4 billion, or 12.4 percent, to $628.8 billion.
``The introduction of the commercial paper program is an
enormous jolt of not just liquidity but stimulus to the
economy,'' Tom Sowanick, chief investment officer at Clearbrook
Financial LLC in Princeton, New Jersey, said in a Bloomberg
Television interview. Clearbrook manages about $20 billion.
American Express Co., the biggest U.S. credit-card company,
and General Electric Co. are among dozens of companies that sold
commercial paper to the Fed since the central bank launched the
program on Oct. 27 to unlock the short-term debt market.
Commercial paper issuance seized up after Lehman Brothers
Holdings Inc. filed for bankruptcy last month, raising concern
among investors that even the biggest banks may fail.
Sales of commercial paper due in more than 80 days totaled
more than $171 billion in the program's first three days,
compared with $33.5 billion all of last week and $115.9 billion
in the previous six weeks combined, Fed data show. Issuance
reached a record $67.1 billion on its first day, compared with a
daily average of $6.7 billion last week, according to Fed data.

Bank Issuers

Financial issuers that had been mostly shut out of the
market for anything but overnight commercial paper were among the
biggest sellers of longer-term paper this week. Top-rated
financial companies sold $39.8 billion of debt due in more than
80 days in the last three days, including $28.2 billion
yesterday, compared with a daily average of about $134 million
since the Lehman bankruptcy filing on Sept. 15.
``This is good news for issuers, as it will relieve strains
associated with having to issue more frequently,'' Tony
Crescenzi, chief bond-market strategist at Miller Tabak & Co. LLC
in New York, said in a note to clients. ``Issuers are now `locked
in' to funding and can go about the normal functioning of their
businesses without having the burden of corporate finance hanging
over their heads.'
Units of GMAC LLC, Chrysler LLC and Ford Motor Co., and New
York-based Morgan Stanley have also registered to issue paper to
the Fed. The Fed announced the program on Oct. 7.
The interest rate the Fed charges to buy commercial paper
fell today after the central bank slashed its target lending rate
by half a percentage point to 1 percent, matching a half-century
low.

Fed's Rate

The Fed set the rate it's willing to accept for 90-day
unsecured commercial paper at 2.74 percent, including a credit
surcharge, down 0.1 percentage point. The rate on paper backed by
assets such as auto loans and credit cards fell the same amount
to 3.74 percent. The rates are set under the Fed's Commercial
Paper Funding Facility and are available on CPFF.
``The CP market continued to benefit from the Commercial
Paper Funding Facility that went into effect this week,'' Bank of
America Corp. analysts led by Hans Mikkelsen in New York said
yesterday in a report.
Money-market investors began fleeing the commercial paper
market after the Lehman bankruptcy, forcing many companies to
roll the debt daily or leave the market and prompting others to
lock in alternative financing. Verizon Communications Inc., the
second-largest U.S. phone company, and Estee Lauder Cos. both
began offering corporate bonds today to repay commercial paper.

90-Day Paper

Quoted rates on 90-day commercial paper, which matures in
270 days or less, fell 0.03 percentage point today to a six-week
low of 3.09 percent, according to yields offered by companies and
compiled by Bloomberg. Rates on the highest-ranked commercial
paper due in 30 days rose 0.27 percentage point to 2.41 percent.
Overnight rates fell 0.15 percentage point to 0.35 percent,
the lowest on record.
The Fed's 90-day unsecured commercial paper rate is 1.74
percent and is comprised of the overnight indexed swap rate plus
1 percentage point. Companies that don't post collateral must pay
an additional 1 percentage point.