Commercial Paper Drops

The total amount of commercial paper outstanding fell sharply for a fourth week in the week ended Wednesday, but the decline in the amount of asset-backed commercial-paper outstanding fell at a slower pace, suggesting that declines in commercial-paper levels are probably set to slow.

There were encouraging data on the number of issues that were sold during the week, as well as the number of issues that were sold with longer maturities than the previous week, suggesting reduced anxieties among investors placing money in commercial paper.

The total amount of commercial-paper outstanding fell $54.1 billion to $1.925 trillion in the week ended Sept. 5, $299.7 billion below the record $2.225 trillion that was outstanding in the week ended July 25. In the latest week, of the $54.1 billion decline, the asset-backed sector contracted $31.3 billion, a smaller decline when compared to the last three weeks, which saw declines of $59.4 billion, $77.1 billion and $48.4 billion, dating back to the week ended Aug. 15.

The cumulative decline of $216.2 billion represents 72% of the total decline in commercial paper outstanding, a large decline considering that asset-backed paper previously represented about half of all commercial-paper outstanding.

A decline of as much as $300 billion in the amount of asset-backed paper is expected, so more declines may lie ahead. Nevertheless, the declines are likely to slow given that shakeouts in the commercial-paper market occur rather quickly because most commercial paper matures within 30-40 days.

In other words, once investors designate an issuer as one that should make an "orderly exit," the exit generally occurs within 30-40 days, when the issuer's paper matures. Commercial paper has contracted sharply for a month already, so the endgame is probably near, unless problems in the credit markets percolate more.

Encouraging Signs

Details of the Fed's report on commercial paper contained some encouraging signs. For starters, the total amount of new issuance was up 7.6% to $207.5 billion. This means that the decrease in the amount outstanding in the latest week was by those forced to make orderly exits and new issuers stepped in, although at a pace not yet fast enough to keep the overall figures from falling.

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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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