Money markets driving drama
Money markets driving drama
By Saskia Scholtes in New York
Copyright The Financial Times Limited 2007
Published: August 20 2007 03:00 | Last updated: August 20 2007 03:00
Money market investors are emerging as drivers of the latest global financial drama, roiling credit markets and hurting corporate borrowers by shunning commercial paper and piling into short-term US government debt.
Yields on short-term Treasury bills last week made their biggest two-day fall since the "Black Monday" stock market crash of October 1987, as spooked commercial paper investors sought to put money in the safest and most liquid short-term assets.
Friday's extraordinary conditions in money and bond markets led the US Federal Reserve to intervene, making direct loans available to cash-strapped banks on more favourable terms and signalling that it would cut its main interest rate if necessary.
Tony Crescenzi, a strategist at Miller Tabak, said the plunge in yields was a result of bets on Fed rate cuts and a flight to quality, and that the demand for bills was "accentuated by shifts out of commercial paper".
Money market funds are important buyers of highly-rated short-term debt such as commercial paper, which has accounted for the largest share of their holdings. However, they have changed their strategy in recent days.
Louise Purtle, a strategist at researcher CreditSights, said money market funds had ignored higher returns on commercial paper and em-braced an "obsession with safety" by adopting a Treasuries-only policy. In doing so, she said, they were "letting loose a short-term corporate funding crisis that appears to be indiscriminate in its effect".
Commercial paper is animportant source of short-term funding for companies and financial institutions. More than half of the commercial paper outstanding is issued to fund port-folios of securities backed by mortgages and other loans.
The market has been volatile on concerns over credit, and losses on debt securities backed by risky US subprime mortgages in particular. As money market investors spurned all but the most liquid government debt, the Federal Reserve reported that the amount of commercial paper outstanding plunged, falling $91bn to $2,132bn in the week to August 15.
Countrywide Financial, the US mort-gage lender, was forced to draw down $11.5bn of credit lines because of trouble in commercial paper markets. Financial institutions also had to agree a plan to end a liquidity crisis in Canadian commercial paper, and two German banks were bailed out.
The turmoil in global credit markets sent investors fleeing to money market funds, boosting such assets to a record $2,700bn and putting more pressure on short-term Treasury yields.
By Saskia Scholtes in New York
Copyright The Financial Times Limited 2007
Published: August 20 2007 03:00 | Last updated: August 20 2007 03:00
Money market investors are emerging as drivers of the latest global financial drama, roiling credit markets and hurting corporate borrowers by shunning commercial paper and piling into short-term US government debt.
Yields on short-term Treasury bills last week made their biggest two-day fall since the "Black Monday" stock market crash of October 1987, as spooked commercial paper investors sought to put money in the safest and most liquid short-term assets.
Friday's extraordinary conditions in money and bond markets led the US Federal Reserve to intervene, making direct loans available to cash-strapped banks on more favourable terms and signalling that it would cut its main interest rate if necessary.
Tony Crescenzi, a strategist at Miller Tabak, said the plunge in yields was a result of bets on Fed rate cuts and a flight to quality, and that the demand for bills was "accentuated by shifts out of commercial paper".
Money market funds are important buyers of highly-rated short-term debt such as commercial paper, which has accounted for the largest share of their holdings. However, they have changed their strategy in recent days.
Louise Purtle, a strategist at researcher CreditSights, said money market funds had ignored higher returns on commercial paper and em-braced an "obsession with safety" by adopting a Treasuries-only policy. In doing so, she said, they were "letting loose a short-term corporate funding crisis that appears to be indiscriminate in its effect".
Commercial paper is animportant source of short-term funding for companies and financial institutions. More than half of the commercial paper outstanding is issued to fund port-folios of securities backed by mortgages and other loans.
The market has been volatile on concerns over credit, and losses on debt securities backed by risky US subprime mortgages in particular. As money market investors spurned all but the most liquid government debt, the Federal Reserve reported that the amount of commercial paper outstanding plunged, falling $91bn to $2,132bn in the week to August 15.
Countrywide Financial, the US mort-gage lender, was forced to draw down $11.5bn of credit lines because of trouble in commercial paper markets. Financial institutions also had to agree a plan to end a liquidity crisis in Canadian commercial paper, and two German banks were bailed out.
The turmoil in global credit markets sent investors fleeing to money market funds, boosting such assets to a record $2,700bn and putting more pressure on short-term Treasury yields.
posted by Carlos T Mock at 10:41 AM
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