Commercial Paper Sinks As Investors Flee to Safety

The Fed reported Thursday that outstanding commercial paper dropped 4.2% this week, its biggest weekly fall in at least seven years, as anxious investors flooded into Treasurys. Paper has fallen by $181.3 billion in two weeks, suggesting that investors were not substantially reassured by the Fed's lowering of the discount rate last Friday. Tony Crescenzi, chief bond market strategist at Miller Tabak, said commercial paper could sink by $300 billion, which would constitute the entire amount of such debt backed by home loans. "The asset-backed commercial paper market is basically history,'' said Bill Gross, manager of world-leading bond fund Pimco. Investor aversion to commercial paper sent Treasury yields to their lowest levels since the October 1987 crash. Over half the $1.1 trillion in outstanding asset-backed paper will be due in the next 90 days. Hedge funds and home-loan companies could be compelled to sell $75 billion of debt, according to UBS AG. That could force prices even further down in a market where investors have already lost $57 billion. In related news, Pimco's Bill Gross said Thursday he is buying the debt of financial companies like Goldman Sachs, Merrill Lynch, Bank of America, Deutsche Bank and American Express because their coupons are surging over 6%. "We like that yield," he said.

Sources: Bloomberg I, II
Commentary: Yesterday's Trading: Calm, Cool and Clueless • The Collapse of Fixed Commitments
Stocks/ETFs to watch: SHY, IEF, TLT

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