Federal Reserve Goes Commercial
Carl Gutierrez, 10.07.08,
The Federal Reserve got into the money markets on Tuesday, its latest move to try to thaw out gelling credit markets. The move failed to reverse the horrendous losses suffered by equity investors in recent weeks, but it had a small positive effect in the bond markets, the immediate object of the exercise.
On Tuesday the U.S. central bank said it would begin purchasing the short-term corporate debt known as commercial paper from American issuers. The decision helps companies that need to borrow -- they will essentially be getting loans from the Fed -- but it fails to directly entice money market funds and other private-sector investors into buying the securities. Still, a slight uptick in credit-market yields indicated that some of the natural buyers of commercial paper might be creeping back into the market.
The facility will buy unsecured and asset-backed three-month commerical paper directly from eligible issuers. The central bank said it believed the facility was needed to prevent substantial financial and economic disruptions.
The market for this crucial financing, which relies on investors rather than banks, has virtually dried up. That has made it increasingly difficult and expensive for companies to raise money to fund their operations.
Later Tuesday President Gary Stern of the Federal Reserve Bank of Minneapolis told the Council of Institutional Investors the central bank's efforts to unlock frozen credit markets should succeed over time to solve the "bear of a problem."
Stern said the Fed runs a risk that its recent moves, while "appropriate" to deal with a year-long crisis, will create instability. For the time being, however, Stern said the Fed must deal with the crisis at hand. He did not address the economic outlook in detail and refused to comment on the likely direction of the Fed's monetary policy. Separately, Ben Bernanke, the Fed chairman, raised the prospect of a rate cut. (See: "Market To Bernanke: Talk Is Cheap")
The Fed's action, which came on the heels of increases to its Term Auction Facility Tuesday, gave stocks an early jolt but the market was sliding late in the day, with the Dow Jones industrial average down more than 400 points, or 4.4%, shortly before the end of trading.
The Fed's move to loosen up the commercial paper market came after morning indications showed credit conditions remain under enormous strain. The overnight London interbank offered rate jumped again to 3.94% from 2.37%, while three-month Libor inched up to 4.32% from 4.29%, illustrating the unwillingness of banks to lend among themselves.
Interest rates on government bonds rose on Tuesday, though they remained at low levels. But that modest move indicated that the Fed's commercial paper move was a positive for investor confidence and that not everybody was hiding out in Treasuries.
Three month Treasury bills yielded 0.74% late in the day, up from 0.55% on Monday. The yield on the benchmark 10-year U.S. Treasury note rose to 3.49%, from 3.42% on Monday. The iShares Lehman 10-20 Year Treasury Bond fund, an exchange-traded fund that tracks long-term government issues, fell 0.2%, or 22 cents, to $109.64.
The Federal Reserve got into the money markets on Tuesday, its latest move to try to thaw out gelling credit markets. The move failed to reverse the horrendous losses suffered by equity investors in recent weeks, but it had a small positive effect in the bond markets, the immediate object of the exercise.
On Tuesday the U.S. central bank said it would begin purchasing the short-term corporate debt known as commercial paper from American issuers. The decision helps companies that need to borrow -- they will essentially be getting loans from the Fed -- but it fails to directly entice money market funds and other private-sector investors into buying the securities. Still, a slight uptick in credit-market yields indicated that some of the natural buyers of commercial paper might be creeping back into the market.
The facility will buy unsecured and asset-backed three-month commerical paper directly from eligible issuers. The central bank said it believed the facility was needed to prevent substantial financial and economic disruptions.
The market for this crucial financing, which relies on investors rather than banks, has virtually dried up. That has made it increasingly difficult and expensive for companies to raise money to fund their operations.
Later Tuesday President Gary Stern of the Federal Reserve Bank of Minneapolis told the Council of Institutional Investors the central bank's efforts to unlock frozen credit markets should succeed over time to solve the "bear of a problem."
Stern said the Fed runs a risk that its recent moves, while "appropriate" to deal with a year-long crisis, will create instability. For the time being, however, Stern said the Fed must deal with the crisis at hand. He did not address the economic outlook in detail and refused to comment on the likely direction of the Fed's monetary policy. Separately, Ben Bernanke, the Fed chairman, raised the prospect of a rate cut. (See: "Market To Bernanke: Talk Is Cheap")
The Fed's action, which came on the heels of increases to its Term Auction Facility Tuesday, gave stocks an early jolt but the market was sliding late in the day, with the Dow Jones industrial average down more than 400 points, or 4.4%, shortly before the end of trading.
The Fed's move to loosen up the commercial paper market came after morning indications showed credit conditions remain under enormous strain. The overnight London interbank offered rate jumped again to 3.94% from 2.37%, while three-month Libor inched up to 4.32% from 4.29%, illustrating the unwillingness of banks to lend among themselves.
Interest rates on government bonds rose on Tuesday, though they remained at low levels. But that modest move indicated that the Fed's commercial paper move was a positive for investor confidence and that not everybody was hiding out in Treasuries.
Three month Treasury bills yielded 0.74% late in the day, up from 0.55% on Monday. The yield on the benchmark 10-year U.S. Treasury note rose to 3.49%, from 3.42% on Monday. The iShares Lehman 10-20 Year Treasury Bond fund, an exchange-traded fund that tracks long-term government issues, fell 0.2%, or 22 cents, to $109.64.
1 comment:
very clever.
Post a Comment