(Adds details, background)
By Richard Leong
NEW YORK Oct 10 The interest rates on U.S.
overnight commercial paper fell on Thursday, suggesting the
start of a thaw after global government efforts to resuscitate
an ailing credit market, Federal Reserve data released on
Improvement in the $1.55 trillion commercial paper (CP)
sector is considered vital in a turnaround in the current
credit crisis that began more than a year ago, analysts and
Many U.S. companies issue commercial paper to raise money
for daily operations such as financing inventories and making
payrolls. This critical funding source nearly dried up when
many money market mutual funds, a major class of CP buyers,
stopped buying this type of short-term corporate IOU's.
Earlier this week, the Fed introduced a new program to
bolster this struggling sector, The Commercial Paper Funding
Facility. When it is up and running it will buy high-quality
CP. The CPFF followed a plan announced last month to aid banks
to finance their purchases of high-quality asset-backed
commercial paper (ABCP) from money market funds.
"When it comes, it will be a significant positive for the
commercial paper market," said David Albrycht, portfolio
manager at Goodwin Capital Advisers and oversees the Virtus
Multi-Sector Short Term Bond Fund in Hartford, Connecticut.
Until that happens, longer commercial paper rates will be
stuck at elevated levels or even scale higher, analysts said.
"Things are still stressed. There is no question," said
James Caron, head of global rates research at Morgan Stanley in
OVERNIGHT CP RATES
Interest rates on overnight CP issued by AA-rated, or
mid-investment grade, financial companies averaged 1.71 percent
on Thursday, down from 2.59 percent on Wednesday, the Fed said
The average rate on overnight CP sold by AA-rated
nonfinancial companies fell to 1.52 percent from 2.27 percent
The overnight rate on asset-backed commercial paper
averaged 3.97 percent, down from 5.07 percent on Wednesday.
While overnight rates showed sizable drops on Thursday,
longer CP rates were mixed.
For example, the average rate on 30-day AA-rated financial
CP jumped to 4.01 percent from 2.75 percent on Wednesday,
according to Fed data.
The average rate on 30-year AA-rated nonfinancial CP fell
to 1.65 percent from 1.85 percent on Wednesday.
Goodwin's Albrycht said investors seem to favor top-flight
CP from nonfinancial companies which include industrial firms,
due to their confidence in the assets on their balance sheets.
This contrasts with worries about further write-downs from
bad mortgage investments on the balance sheets of banks and
financial companies, according to Albrycht.
(Reporting by Richard Leong)