NEW YORK (Reuters) – Rates on U.S. short-term corporate loans fell on Friday, suggesting that investors had begun to respond to the Federal Reserve’s interventions to return liquidity to the market, according to data released on Monday by the central bank.
The rate at which nonfinancial companies could borrow lower-grade commercial paper on Friday – as the short-term loans are known – fell at every maturity. For higher-grade paper, rates fell at every maturity except 30 days.
Friday’s data represents the most consistent fall in those rates across the quality spectrum since March 4, according to Fed data.
It suggests that there has finally been a return of some liquidity to the market since the Fed on March 17 said that it would reinstate the Commercial Paper Funding Facility (CPFF), an operation used during the 2008 financial crisis, in which the central bank acts as a lender of last resort for companies otherwise unable to borrow in the short-term market.
“It does seem as though rates are calming down… so that’s an improvement. The absolute amounts that the Fed has purchased that we know about aren’t that big yet, but I think the fact that they are going to stand in the market is certainly easing a lot of concerns. It is working,” said Marvin Loh, senior global market strategist at State Street Global Markets.
One reason that the Fed’s announcement may not have immediately lowered rates in the commercial paper market is that the market interventions did not start immediately.
“The (special purpose vehicle) that they set up to actually be the backstop for the (commercial paper) world is still coming together. They did in the middle of the week start buying more aggressively with the actual money market liquidity facility, so that certainly helped,” said Loh.
The overnight borrowing rate for lower-grade nonfinancial paper US1DCP22= fell to 2.53%. For overnight higher-grade nonfinancial paper US1DCP= it fell to 0.13%, which it had also hit on Thursday, the lowest since 2015.
The spread between the two rates, a measure of how risky investors believe the lower-grade paper is over its higher-grade equivalent, was 240 basis points. It had hit 264 basis points on March 20, its highest since 2008.
As for the market on Monday, Loh said, “Things are stable. Much calmer than we had in the middle of last week, but not that much better than Friday. Just stable from Friday’s levels.”
Reporting by Kate Duguid; Editing by Lisa Shumaker and Cynthia Osterman