NEW YORK, March 16 (Reuters) - Calls from investors for the Federal Reserve to introduce liquidity into the commercial paper market - which companies tap for short-term loans - ramped up on Monday, while IFR, Refinitiv’s capital markets news service, reported persistent liquidity issues in the market.
On Sunday night, the central bank announced purchases of at least $700 billion in Treasuries and mortgage-backed securities in coming weeks to bolster liquidity. But no such measures were announced for the commercial paper market whose liquidity - the ease with which traders can buy and sell assets - has evaporated in recent weeks as the coronavirus has roiled credit markets. Commercial paper prices have also fallen on expectations of a rush of new issuance as companies are shut out of capital markets.
“We think the Fed will pull out some of its old facilities to help confirm liquidity in the commercial paper markets – namely the (Commercial Paper Funding Facility). I expect that to happen soon,” said Debbie Cunningham, chief investment officer, global liquidity markets, at Federated Hermes, Inc.
Bank of America’s head of U.S. rates strategy Mark Cabana, wrote on Monday that without one, the commercial paper market would “remain frozen in the near term and we will continue to see stress in credit linked front end markets.”
Investors were demanding the highest premium since January 2009 to hold riskier commercial paper versus the safer equivalent as of Friday.
The spread between the safer AA-rated overnight paper of nonfinancial companies versus riskier P2 overnight commercial paper rose to 138 basis points on Friday, according to the most recent Federal Reserve data.
IFR reported on Monday, citing a money market investor, that interest rates on overnight to one-week CP from top-tier banks were quoted at 1.00%-1.50% while for lower-rated banks, CP rates were quoted at 5.00%-5.50%, underscoring the sector’s illiquidity.
Companies rely on commercial paper as a source of short-term cash for payrolls, inventory and accounts payable as well as unanticipated funding needs.
Cabana and other Bank of America analysts said on Friday they believed the Fed would announce a Commercial Paper Funding Facility, an operation the central bank used in 2008 to directly buy commercial paper from issuers, and a Commercial Paper Dealer Purchase Facility in which it would directly buy from dealers.
The issue may be a regulatory one, said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
“Since the passage of Dodd-Frank legislation, the Fed now has to seek approval from the U.S. Treasury to re-introduce commercial paper liquidity measures,” she said.
That might be slowing down the revival of a CP liquidity facility, she said. Further, the Fed “might be thinking it has done a lot and wants to see how these actions play out.”
Bostjancic added that the Fed had waited during the financial crisis, and did not enact the Commercial Paper Funding Facility (CPFF) until the fall of 2008 after spreads started spiking in 2007.
Reporting by Kate Duguid; editing by Megan Davies and Richard Chang
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