Overnight CP drops

AS I have predicted, US government take emergency steps to ease the seizure in money markets. Oct. 7 (Bloomberg) -- U.S. overnight corporate borrowing costs fell as the Federal Reserve invoked emergency powers tocreate a special fund to backstop the commercial paper market.Seven-day rates soared to the highest since January. Yields on top-rated overnight U.S. commercial paper dropped0.74 percentage point to 2.94 percent, according to datacompiled by Bloomberg. Borrowing for seven days increased 1.25percentage point to 4 percent. Fed Chairman Ben Bernanke is seeking to end the seizure incredit markets that has spread around the globe and ensnaredcorporate borrowers. Overnight rates soared to an eight-monthhigh of 3.95 percent last week, from 2.08 percent less than amonth ago, curbing companies' ability to finance their day-to-day activities. Companies struggled to issue since LehmanBrothers Holdings Inc. filed for bankruptcy Sept. 15 and money-market funds, the biggest buyers of commercial paper, abandonedthe market. ``The linchpin seems to be commercial paper,'' said JohnSilvia, chief economist at Wachovia Corp., in an interview onBloomberg Television. Lehman was a ``key cog in that commercialpaper trading. Once they went out, there really was a great lossof confidence.'' The Fed will lend against a special purpose vehicle at thetargeted federal funds rate. The unit will purchase from eligible issuers three-month dollar-denominated commercial paperat a spread over the three-month overnight-indexed swap rate,according to a Statement in Washington today. Bernanke is scheduled to speak on the economic outlookstarting at 12:30 p.m. in Washington today. Market Shrinks ``What that allows is that other businesses can pick up some reserves, some cash and therefore there's more liquidity inthe system,'' Wachovia's Silvia said. He said the world'scentral banks may coordinate a series of rate cuts as soon astoday. The market for commercial paper, which matures in nine months or less and is used by companies from General ElectricCapital Corp. to Microsoft Corp. to pay for daily expenses,plunged last week by the most since at least 2000. The debtout standing fell $94.9 billion, or 5.6 percent, to a seasonallyadjusted three-year low of $1.6 trillion for the week ended Oct.1, according to the Fed. Financial paper accounted for most of the decline, dropping $64.9 billion, or 8.7 percent, to a two-year low as money-market funds stopped buying. GE Capital was offering 1.95 percent to borrow overnight,up from 1 percent yesterday, according to Bloomberg data. `Fear Itself' Bill Gross, manager of the world's biggest bond fund atNewport Beach, California-based Pacific Investment ManagementCo., said the Fed should step in to directly buy commercialpaper. ``We are to the point of fearing fear itself,'' Gross wrotein a note to clients yesterday. ``The Federal Reserve must nowact as a clearing house'' for banks and ``must also take anotherbold step: outright purchases of commercial paper.'' Efforts to free up lending, including the passage of a $700billion plan to rescue banks and injections of more than $1trillion into the global financial system, have failed. Theworld economy has already fallen into its first recession since2001, according to JPMorgan Chase & Co. economists Bruce Kasmanand David Hensley, and the slump may deepen if the credit freezepersists. Libor Rises The cost of borrowing in dollars overnight in London jumpedas U.K. lenders held talks with the government on emergencyfunding and Iceland began talks for a loan from Russia, peggedthe krona to a trade-weighted index and nationalized its second-biggest bank. The London interbank offered rate, or Libor, that bankscharge each other for such loans rose 157 basis points to 3.94percent today, the British Bankers' Association said. Thecorresponding rate for euros climbed 22 basis points to 4.27percent, the highest in four days. The Tokyo interbank ratestayed at the highest level this year and the Libor-OIS spread,a gauge of cash scarcity among banks, widened to a record. Prime money-market funds have pulled $200.3 billion of assets from commercial paper since Sept. 16, the day after Lehman filed for the biggest bankruptcy ever, and built up theirsafer government debt holdings instead, according to IMarketNet. Issuance of commercial paper due in one to four days hasaveraged $145.3 billion a day since Sept. 15, compared with$87.7 billion a day in August, Fed data show. Sales of the debtdue in more than that has averaged $31.2 billion a day, comparedwith $45.5 billion in August and $53.8 billion in 2007. After falling to $21.3 billion on Sept. 29, longer-termlending has since increased to $44.4 billion on Oct. 3,according to Fed data.