FED to Purchase U.S. Commercial Paper to Ease Credit Crunch

October 7, 2008 – 4:53 pm

Fed to Purchase U.S. Commercial Paper to Ease Crunch (Update1)

By Craig Torres

Oct. 7 (Bloomberg) — The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations.

The Treasury will make a deposit with the Fed’s New York district bank to help set up the special purpose vehicle. The central bank will also lend to the program at policy makers’ target rate for overnight loans between banks. The Fed Board invoked emergency powers to set up the unit, the central bank said in a statement released in Washington.

Today’s action follows a slide in the commercial-paper market to a three-year low of $1.6 trillion last week as investors fled even companies with few links to the subprime mortgage crisis. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market’s disruption.

The Fed didn’t say how much commercial paper, which hundreds of companies use to finance payrolls and meet other cash needs, it plans to purchase.

Stocks climbed and Treasuries sank after the Fed’s announcement. Futures on the Standard & Poor’s 500 Stock Index gained 1.9 percent to 1,073.60 at 9:15 a.m. in New York. Yields on benchmark 10-year notes climbed to 3.55 percent from 3.45 percent late yesterday.

Bernanke Speech

Today’s announcement came hours before Fed Chairman Ben S. Bernanke speaks on the economic outlook at 1:15 p.m. in Washington. He and Treasury Secretary Henry Paulson held discussions yesterday as stock markets slid and money market rates climbed as the crisis deepened.

The Fed’s new unit will buy three-month dollar-denominated commercial paper at a spread over the three-month overnight- indexed swap rate, which is a measure of traders’ expectations for the Fed’s benchmark rate.

Commercial paper purchased by the vehicle must be rated at least A1/P1/F1, the Fed said. Issuers will pay the unit an upfront fee based on the commercial paper initially sold to the vehicle. The vehicle will cease buying commercial paper on April 30, 2009, unless the Board of Governors agrees to extend it.

The Fed yesterday said it will double its cash auctions to banks to as much as $900 billion, and telegraphed today’s announcement by saying it was looking for other ways to alleviate liquidity strains.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
Last Updated: October 7, 2008 09:31 EDT

RESULT:
Treasuries Tumble as Fed Agrees to Purchase Commercial Paper

By Dakin Campbell and Bo Nielsen

Oct. 7 (Bloomberg) — Treasuries declined after the Federal Reserve said it will purchase commercial paper through a special unit in an effort to thaw short-term lending markets, damping demand for the haven of government debt.

Two-year notes fell for the first time in five days, pushing yields up from the lowest level since March, after the central bank invoked emergency powers to support the financing needs of corporations. The U.K. may invest as much as $79 billion in the country’s three largest banks, while Iceland today took over Landsbanki Islands hf, the island nation’s No. 2 lender, and pegged its currency to a trade-weighted index.

The yield on the 2-year note rose 10 basis points to 1.54 percent as of 9:11 a.m. in New York, according to BGCantor Market Data. The 4 percent security maturing in August 2018 dropped 7/32, or $2.19 per $1,000 face amount, to 100 28/32.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net
Last Updated: October 7, 2008 09:15 EDT

Commentary:

it will get worse before it gets better. Buying up commercial paper is just a first step in a larger debt-acquisition game.

According to yesterdays most fear-inspiring finance article:

“As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt.

‘The US government has a technology, called a printing press,’ said Fed chief Ben Bernanke in November 2002. (His helicopter speech).“