Commercial Paper Tally Plunges Again

For a second week, the total amount of commercial paper outstanding plunged, marking a historic two-week decline, according to data just released by the Federal Reserve. The total amount of commercial paper outstanding fell $90.2 billion in the week ended Aug. 22 to $2.042 trillion after falling $91.1 billion the previous week.

The decline indicates that many companies have been forced to make orderly exits from the commercial paper market, a market that has shown virtually no tolerance for bad credit or risky entities for more than 30 years. If the companies that previously tapped the credit markets are to continue their operations at levels seen previously, they will have to raise money elsewhere, an option not open to all these days.

Most of the decrease in the amount of commercial paper outstanding was in the asset-backed segment, with the tally falling $77.1 billion in the latest week following a decline of $48.4 billion. The only solace in the new data is the fact that outside of the asset-backed sector, the decline was about a third of the previous week's drop.

It is expected that the commercial paper market could shrink as much as $300 billion, roughly the amount of commercial paper backed by mortgage loans. As I note in my 1,200 page book, Stigum's Money Market, investors have scant tolerance for risk in the commercial paper market, a market that has seen only seven defaults since Penn Central infamously defaulted on its commercial paper in 1970. That event led to a cleansing of the commercial paper market via new demands by investors, such as credit lines and more oversight by the rating agencies.

There were no defaults in the CP market in the 1990s and just two this decade: Californian utilities under strain during California's energy crisis. Companies under strain are forced to make orderly exits from the commercial paper market. Tyco (2002) is a recent example. This elite club will not let entities back in until or unless they are deemed good credits or seen as low risk.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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