By Laura Mandaro in MarketWatch:
Outstanding commercial paper fell the most ever this week, while the size of a program started by the Federal Reserve to help companies hang onto a key source of short-term funding also showed a marked decline, according to new data released Thursday.
Outstanding commercial paper fell $98.8 billion in the week ended Jan. 28, to $1.59 trillion. That was the largest weekly decrease since the Fed started tracking volumes of this short-term corporate debt in 2001. Levels haven't been this low since the last week of October.
In a separate statement released late Thursday, the Fed said its holdings of commercial paper through its Commercial Paper Funding Facility, or CPFF, fell in the same week. They declined $33.7 billion to $316 billion.
Analysts trying to piece together the jigsaw of data sets said the decline in outstanding volumes likely reflected companies' ability to issue other types of debt, as the three-month commercial paper they had sold to the Fed matured.
Rather than sell new commercial paper to the Fed above-market rates, they likely funded some of their short-term capital needs by issuing other forms of debt, such as bank bonds backed by the Federal Deposit Insurance Co.
Foreign banks, meanwhile, may have tapped Yankee certificates of deposits, analysts said.
"The past week's decrease is arguably the result of improved conditions in the money market," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.
Analysts and economists will be closely watching levels of commercial paper over the next week to see whether private investors are willing to return to this market. It faces a key hurdle when an estimated $230 billion to $245 billion, issued at the time the Fed started the program, comes due. See earlier story on commercial paper market.
The Fed has been acting as a lender of last resort to the commercial paper market since it started buying high-quality, three-month commercial paper, for a fee, on Oct. 27. It started this program after the collapse of Lehman Brothers Holdings Inc. in September sent investors fleeing corporate debt, making it tough for companies such as General Electric Co. to access short-term funding for daily operations such as payroll.
The program enjoyed heavy demand from issuers, with the Fed's holdings rising to $350 billion last week. Thanks to the Fed's hand in this market, commercial paper volumes rebounded and, earlier this month, topped levels last seen before the Lehman Bros. failure.
"My impression is that the market has improved, and the Commercial Paper Funding Facility is really a crutch for the market," said Joseph Abate, money market analyst at Barclays Capital.
The Fed's rates are now higher than market rates for top-rated financial commercial paper, encouraging companies that need to refinance their maturing debt to try to sell their debt to private buyers.
But no one knows whether institutional investors will play along.
"Weaning the CP market off of life support ... is a scenario that will need to play out over and over again over the next several years, as the Fed seeks to exit from the various extraordinary programs put into place," said Stephen Stanley, chief economist at RBS Greenwich Capital, earlier this week.
If issuance sinks but the Fed's holdings of commercial paper stay high, that could indicate this market still needs the support of the Fed. Some investors anticipate the Fed will have to extend the commercial paper program past the April 30 deadline.
Analysts said that banks, historically the biggest users of the commercial paper market, have been tapping other corners of the credit market that are also supported by the government.
Citibank last week issued $12 billion of securities under the FDIC's guarantee program.
"Banks that raise capital through the FDIC's program can cut their short-term borrowing, a desirable goal in the current environment where excessive reliance upon short-term funding is extremely risky," Crescenzi said.
Anurag Bhardwaj, an analyst with Bank of America Merrill Lynch, said that banks' issuance of commercial paper had fallen two-thirds from when the Fed's commercial paper program started.
At the same time, the analyst estimates banks and other financial companies issued about $167 billion of bonds backed with guarantees from the FDIC.
But at this point, determining whether erstwhile commercial-paper issuers have found a better alternative in other credit markets -- or were simply barred from raising private funding altogether -- amounts to little more than reading the credit-market tea leaves.
"We don't know if the difference between what matured and what didn't go into in the commercial paper market, where it went," said Barclays' Abate.