Interest rates on 90-day commercial paper are on the rise, even as the yield on the 90-day (3-month) Treasury bill has moved sharply lower.
By Pam Martens and Russ Martens of Wall Street on Parade.
According to the most recent statistical release from the Federal Reserve, the average annual interest rate on 90-day AA-rated financial commercial paper has risen from 2.18 percent in 2018 to 2.27 percent through November 15 of this year. The rise in the average annual interest rate on 90-day commercial paper contrasts with the fact that since May of this year, the 90-day (3-month) Treasury bill’s yield has moved sharply lower, from 2.4 percent to yesterday’s closing yield of 1.56 percent – a decline of 35 percent.
The Federal Reserve Bank of New York has effectively become the repo market – pumping out upwards of $3 trillion to that market since September 17. Can we expect the Fed to turn on the money spigot to the commercial paper market next?
We raise this scenario because that’s exactly what the Fed did to the tune of almost $1 trillion from the fall of 2008 to February 1, 2010 during the financial crisis.
On September 19, 2008, four days after the bankruptcy filing of Lehman Brothers, the Fed created the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). The Fed then proceeded to pump out $217 billion under that facility until February 1, 2010, ostensibly so that banks could buy up asset-backed commercial paper from money market funds that had been tainted with subprime loans in order to prevent a panic run on those funds. According to the audit conducted by a federal agency, the Government Accountability Office (GAO), $111 billion of AMLF funds went to JPMorgan Chase.
The AMLF wasn’t enough to stem the problems in the commercial paper market so 18 days after the Fed created the AMLF it announced the creation of the Commercial Paper Funding Facility (CPFF). That program operated from October 27, 2008 until February 1, 2010. Through that facility the Fed pumped out $738 billion in loans to a Special Purpose Vehicle (SPV) that made outright purchases of commercial paper.
The GAO explains the purpose of the CPFF like this:
“By standing ready to purchase eligible commercial paper, CPFF was intended to eliminate much of the risk that commercial paper issuers would be unable to ‘roll over’ their maturing commercial paper obligations—that is, they would be unable to repay maturing commercial paper with a new issue of commercial paper. By reducing this roll-over risk, CPFF was expected to encourage investors to continue or resume their purchases of commercial paper at longer maturities.”
As the CPFF chart from the GAO audit shows (see chart below), two of the three largest borrowers under the facility were foreign. UBS of Switzerland got $74.5 billion while Dexia SA of Belgium received $53.5 billion. Sixty percent of the top 25 borrowers were foreign financial institutions. Undoubtedly, many of those institutions were in trouble with their commercial paper because they had purchased subprime toxic debt bombs from Wall Street banks. Thus, an unstated purpose of the CPFF was to salvage the reputation of Wall Street and lessen the number of lawsuits over toxic debt issuance…