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Fed sets rates for commercial paper facility

Fed sets rates for commercial paper facility

The Federal Reserve said Monday it is asking a rate of 1.88 percent to buy unsecured commercial paper, plus a 1 percent surcharge, and a rate of 3.88 percent for asset-backed commercial paper.
The Fed said earlier this month it would start buying commercial paper to bolster the market. Commercial paper is the short-term debt that companies sell for their short-term financing needs. Sometimes it is unsecured; other times, it is backed by assets such as mortgages.
Demand for the paper dried up after Lehman Brothers Holdings Inc.'s bankruptcy and other troubles in the global banking system. The biggest buyers of commercial paper are money market funds _ some of which took big hits when Lehman collapsed.
Overall, commercial paper rates Monday were modestly higher than they were Friday, said Bianco Research strategist Howard Simons. But for 90-day unsecured paper and 90-day asset-backed paper _ the type of paper the Fed is offering to buy _ rates were lower, Simons said.
American Express Co. was posting a rate of 2.88 percent on its unsecured paper to market buyers Monday _ matching the Fed's asking rate, essentially _ while General Electric Co. was posting a rate a bit above 3 percent to market buyers, said Kevin Giddis, managing director of fixed income at Morgan Keegan.
It was unclear whether the Fed had bought any paper yet, Giddis said.
On Friday, GE _ the largest commercial paper issuer _ confirmed it was planning to use the Fed's program.
The market for commercial paper has dropped for six straight weeks. As of last Wednesday, commercial paper outstanding stood at a seasonally adjusted $1.45 trillion, down from $1.82 trillion six weeks ago, and well below the $2.2 trillion seen when the market peaked in the summer of 2007.


Updated : 2021-07-31 07:51 GMT+08:00