Capital Markets

A Silver Lining amid the Credit Crunch

The market for asset-backed commercial paper suddenly surges. Is it a fluke or the beginning of a trend?
Stephen TaubJanuary 3, 2008

Amid the angry clouds over the credit markets, there is this silver lining: The market for asset-backed commercial paper grew for the first time since August during the week ended January 2, Bloomberg reported. And the cost for borrowing in that market fell to the lowest level in 22 months.

Asset-backed commercial paper is debt backed by mortgages, credit-card loans, and other assets that matures in 270 days or less.

The total amount of this paper rose $26.3 billion to a seasonally adjusted $773.8 billion for the week, according to Bloomberg, citing Federal Reserve data. The 3.5 percent increase was the largest in at least seven years, it was noted.

That gain, however, came after 20 straight weekly declines thanks to losses from subprime mortgages, which scared away investors from most debt markets.

According to analysts, data from the Federal Reserve in the coming weeks will tell whether the sudden growth spurt in the asset-backed market was a fluke linked to “extraordinary” efforts by central banks to keep the market liquid, the Associated Press reported.

Regarding the falling cost of capital in this market, Bloomberg noted that the yield on paper due in 30 days posted its biggest weekly decline in at least a decade — down 116 basis points, to 4.63 percent. That works out to nine basis points more than the one-month London interbank offered rate (LIBOR), according to Bloomberg.

In the first half of 2007, the yield on asset-backed commercial paper was on average 5.5 basis points less than LIBOR, according to the wire service.