Forget artificial stock markets. Here’s where the real market news is - in the turmoil rocking the world’s most liquid (non-sovereign) debt market.
The latest commercial paper yield numbers, from the Federal Reserve:
Why the N.A.?
Trade data insufficient to support calculation of the 30-day AA nonfinancial, 60-day AA nonfinancial, 90-day AA nonfinancial, 90-day A2/P2 nonfinancial, and 90-day AA financial rates for September 22, 2008.
It looks as if the non-financial CP market - for anything with more than a two week maturity - has all but collapsed. Outstanding volumes of commercial paper in issuance are falling once more across the board, as they did this time last year.
What does the collapse in non-financial lending mean? It’s a direct impact on corporates. Spreads have exploded outwards on non-financial CP - so even if corporates do manage to roll, they’ll pay for it. The credit crunch is indeed moving to main street.
The proximate cause for the distress in the market as a whole is the turmoil roiling money market funds - the CP’s chief buyers.
Things are worrying because the US government has promised a backstop to prevent any more of the funds doing a Reserve Primary and breaking the buck. That hasn’t stopped what appears to be a huge structural realignment of the money mutuals away from short-term paper. Nor has it stopped redemptions from those money market mutuals. US funds saw an estimated $197bn of outflows last week. To put that into context, in the whole month of July, just $27bn was withdrawn from them.
But - rather counterintuitively - firms are issuing more CP.
Total CP issuance last week jumped 17 per cent up from the week before. Two trends: the jump is principally in issuance of the very shortest term notes - with maturities of 1-4 days. And it’s mainly in financials.
The dollar volume of AA rated financial CP issued jumped from $7.2bn on Sep 19th to $14.6bn on Sep 22nd. On the face of things, that implies a return of confidence in financial issuers. But there’s a caveat: longer term issuance has continued its downward slope. No CP was issued with a maturity of more than 81 days this week.
That so much CP is being issued only on the very shortest maturities is hardly cause for celebration. The volume of 1-4 day issuance went from $5.3bn on the 19th to $12.4bn on the 22nd, which mirrors rather neatly the utter collapse of regular interbank lending captured in Libor. CP issuance, in other words, is perhaps rising not necessarily because of returning confidence, but perhaps because of collapsing interbank confidence.
Non-financial CP is in trouble because buyers are shifting out of it and into CP with an implicit government backing - financial CP.
Corporates are the ones left suffering.
From Morgan Stanley analysts this morning:
The authorities still have a couple of strings to their bow before resorting to non-market measures (see our notes from today and Friday on the Swedish banking crisis). These are: moral suasion to encourage term interbank lending; and official rate cuts. The scope for the former in current markets looks insufficient: the time for the latter, it seems, may be rapidly approaching.
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