Signs of Hope Emerge in Credit Markets

Investors are still not convinced that the worst is behind them, as each rally, even a spectacular one, is met with selling.

However, some key indicators measuring the underlying health of the market are heading in the right direction. Commercial paper issuance from Oct. 3 to Oct. 10 rose 2.9%, and rates are also dropping. On Tuesday, the U.S. asset-backed 30-day yield on commercial paper dropped 0.15 points to 4.47%, and the seven-day fell 0.94 points to 4.25%. Not huge declines, but welcome ones.

Equally notable was the change in the London Interbank Offered Rate, or Libor, which is the benchmark for interbank loans. Three-month Libor is now at 4.33%, down from 4.75% recently.

The moves have taken place as the governments of the U.S. and other nations have revealed a host of plans to restore faith in the credit markets. On Tuesday, the Federal Reserve Bank of New York issued additional details regarding the Commercial Paper Funding Facility. The CPFF was established earlier this month with the mission to purchase commercial paper and in turn improve the short-term lending market.

A special entity will be set up to purchase the debt, and the buys will be limited to the paper an issuer had outstanding between Jan. 1 and Aug. 31, 2008. Purchases will begin Oct. 27 and end April 30, 2009. The Fed won't disclose the issuers or the amounts issued. Presumably, the secrecy is to protect those companies that need the help.