PIMCO to manage commercial paper fund: Fed

NEW YORK (Reuters) - Pacific Investment Management Co., or PIMCO, the world's largest bond fund, will serve as asset manager for the Federal Reserve's Commercial Paper Funding Facility, the Federal Reserve Bank of New York said on Tuesday.

State Street Bank and Trust Co. will serve as custodian for the facility, the Fed added.

The facility, known as the CPFF, aims to complement the Fed's existing credit facilities to help provide liquidity to term funding markets.

Last week, the Fed announced a backstop measure that would create a special purpose vehicle to buy three-month commercial paper directly from eligible companies, which must have at least top A1/P1/F1 ratings.

Many U.S. companies issue commercial paper for financing operations such as inventories and payroll. The Fed's measure is expected to bring down the elevated rates and encourage lending for longer than just one day.

Fed officials said the CPFF will become operational on October 27.

"The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities," the Fed said on Tuesday.

As a result, an increasingly high percentage of outstanding commercial paper must now be refinanced each day, interest rates on longer-term commercial paper have increased significantly, and the volume of outstanding commercial paper has declined, the Fed said.

The Fed said the CPFF should "contribute to an overall improvement of conditions in credit markets."

PIMCO, a unit of German insurer Allianz, oversees more than $812 billion in assets.

(Reporting by Jennifer Ablan and John Parry; Editing by Tom Hals)