Understanding the Trends in Commercial Paper Issuance
Expect the impending resolution of the European sovereign credit situation to lead to a rebound in issuance levels.
Alas, just as spinach is purported to be good for you, commercial paper, last discussed here in June 2010 (see A Commercial for Commercial Paper), is important to the interesting markets you know and love. Nonfinancial corporations issue gobs of it to fund operations, inventories, and accounts receivable; money market funds have been the principal buyers of CP over the years. As we found out the hard way in September 2008, money market funds that bought CP and got TP instead broke the buck, the wind, and more than one heart.
European banks that did not trust each others' balance sheets and avoided the interbank market turned to the CP market and found more than one American buyer, at least until those American buyers decided they might not want the credit risk of those banks. The result has been a rollercoaster of issuance by foreigners over the last few years; we recently saw a massive pullback in issuance under a buyers' strike. Expect the impending resolution of the European sovereign credit situation, the one involving European commercial banks taking a haircut on their Greek bonds before they will get European Financial Stability Facility credit to buy more European sovereign debt (yes, you read that right), to lead to a rebound in this issuance level.
If we return to US issuance, we see asset-backed paper remains dead in the water and probably dead on dry land, too, as the mortgage-backed market remains federalized. Nonfinancial firms' direct issuance has rebounded along with higher bank lending (see Commercial Lending Is on the Rise, Money Supply Is Up), and this is an unmistakable sign of economic stabilization and higher growth. Offsetting this upturn, financial firms' direct issuance has been pressured by the fear of European contagion and the risks it posed to American banks. This level should rebound as well as the European situation moves toward resolution.
The net result is the very basic and very boring funding base for business has found a footing outside of the moribund asset-backed sector. This does not mean sunny skies ahead, but it does take away one major possible source of implosion, one that threatened us all in 2008, and who can be upset about that?
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter