Capital Markets

Short Term Rates Are Now at a 4-year Low

Fed's efforts are rated as a success in accelerating moves to boost commercial paper.
Stephen TaubOctober 22, 2008

Masked by the violent swings in the stock market recently has been the steady daily improvement in credit markets for corporate and other borrowers.

In fact, Bloomberg News reports that short-term borrowing rates have fallen to a four-year low thanks to the Federal Reserve.

The wire service said that accelerated moves by the Federal Reserve Board to boost the commercial paper market by providing loans to money-market funds that buy the debt have enabled rates on the highest-ranked 30-day commercial paper to drop by 1.46 percentage points, to 1.92 percent. Rates on overnight and 90-day paper also declined.

Specifically, Bloomberg pointed out that on Tuesday the Fed committed to provide as much as $540 billion in loans to boost money-market funds. This is the third action taken since Lehman’s bankruptcy led to a near-global credit freeze, according to the report.

The backstops are “having a major effect,” Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co., reportedly wrote in a note to clients. “It’s almost completely backstopped now, both by the private sector and the Federal Reserve, and rates should fall in line,” Crescenzi told Bloomberg in the follow-up interview.

Bloomberg also pointed out that Citigroup posted a rate of 3.22 percent on 30-day commercial paper, down from 3.6 percent on Monday and the lowest in four weeks.

The wire service also reported that American Express Co., the biggest U.S. credit-card company by purchases, cut its rate to 2.25 percent from 2.3 percent, the lowest since June 3.

In addition, Bloomberg noted that these days the highest-rated companies are issuing more longer-term paper since these days most companies, especially banks, are unable to issue debt due in more than one day.

Meanwhile, a separate Bloomberg report pointed out that the cost of borrowing in dollars in London for three months fell for an eighth day, the longest run of declines since May, thanks to the Fed’s moves.

Specifically, the London interbank offered rate (Libor) dropped 29 basis points to 3.54 percent, according to Bloomberg, citing the British Bankers’ Association. The overnight dollar rate slid to 1.12 percent, the lowest level since June 2004. Rates on 30-day company debt dropped the most on record, according to the report.

“The funding situation has improved and will probably continue to improve, but what will surprise is the length of time it will take,” Patrick Bennett, a currency strategist at Societe Generale SA in Hong Kong, told the wire service.