NEW YORK, Oct 8 (Reuters) - Interest rates on overnight U.S. commercial paper jumped on Tuesday even after the Federal Reserve unveiled a program to buy this class of short-term debt with the goal to boost this struggling sector, according to Fed data released on Wednesday.
The borrowing costs on these overnight IOU’s — crucial to many companies’ ability to raise money for their day-to-day operations — spiked up 1 percentage point in some cases, the Fed said.
On Tuesday, the Fed said it created a facility to buy commercial paper as money market mutual funds, once a major buyer of this type of debt, have shunned it after the bankruptcy of Lehman Brothers shook up the money market fund industry last month.
The Commercial Paper Funding Facility will buy only top-rated or the least risky commercial paper. Of the $1.75 trillion in commercial paper outstanding in August, eligible issuers accounted for $1.3 trillion, but the Fed has no intention to buy anywhere near that amount, government officials said on Tuesday.
The Commercial Paper Funding Facility is not up and running yet.
Overnight rates on commercial paper issued by “AA”-rated or mid-investment-grade nonfinancial companies averaged 2.62 percent on Tuesday — up from 1.39 percent on Monday.
The average overnight rate on debt issued by lower-rated nonfinancial companies was 5.67 percent — up from 4.60 percent on Monday, the Fed said.
Overnight rates on commercial paper issued by financial companies averaged 2.54 percent — up from Monday’s 1.72 percent.
In the asset-backed commercial paper sector, overnight rates averaged 4.90 percent — up from 2.96 percent on Monday, the Fed said.
But there were hopes in the market that the government’s commercial paper program could help bring down short-term corporate borrowing costs.
Average commercial paper rates beyond one week slipped modestly on Tuesday from Monday’s levels, according to the Fed. (Reporting by Richard Leong; Editing by Jan Paschal)