US sees asset-backed market shrink

Posted 12 14 2007 4:24PM

The size of the US asset-backed commercial paper market has shrunk for an 18th consecutive week, reducing this important source of funding for financial institutions to its lowest level in two years.

For the week ending on Wednesday, the amount of outstanding ABCP declined $10.3bn to $791bn.

The week before, ABCP declined $23bn and since the market peaked at $1,200bn in early August, it has shrunk by more than one-third.

The overall commercial paper market also continued to contract last week, with the outstanding total lower by $5.3bn to $1,839bn. The market shrank $10.2bn the previous week. The amount of outstanding commercial paper is now at its lowest level in more than a year.

Traders say the buyers' strike for commercial paper, particularly for paperbacked by assets such as mortgages and car loans, will continue as the end of the year beckons.

Buyers such as money market funds do not want to hold paper issued by entities such as structured investment vehicles (SIVs).

Around 75 per cent of ABCP is being funded on an overnight basis and analysts say money funds and banks are seeking to avoid holding such exposure over the year-end.

With banks anxious to conserve funds in the interbank market, the usual year-end demands for cash have exacerbated an already tense situation.

"It is banks refusing to lend to SIV/ABCPs backed by dodgy assets, or the banks with large exposure to them, that broke the liquidity cycle," said George Goncalves, chief treasury and agency strategist at Morgan Stanley.

Meanwhile, the issuance of financial commercial paper rose $9bn last week and now totals $863.5bn.

Since late November, the volume of outstanding financial commercial paper has increased from $827.6bn, while the total amount of ABCP has shrunk below $800bn. Not since 2001 has financial CP been greater than ABCP.

According to analysts, this shows that banks are funding more assets directly, rather than through SIVs and other off-balance sheet entities. The shrinking commercial paper market is one factor behind the current elevated money rates in the interbank lending market. In spite of a co-ordinated plan to inject more liquidity into the markets by central banks this week, dollar, sterling and euro denominated Libor remains well above the overnight borrowing level set by central banks.

The 30-day rate for commercial paper fell to 4.98 per cent on Thursday, down from a high of 5.21 per cent on Monday, but above a low of 4.56 per cent in early November.

The 30-day rate for asset-backed commercial paper had eased to 5.97 per cent on Thursday. This was down from a high of 6.16 per cent earlier this week, but one-month ABCP was trading at 4.75 per cent a month ago.