Rates on commercial paper continue to rise after Fed action

By Kate Duguid

NEW YORK (Reuters) – The cost for companies to borrow short-term loans increased again on Thursday, suggesting investors remained skeptical that the Federal Reserve’s facility announced on Tuesday would significantly improve liquidity in the commercial paper market.

The Fed will reinstate an operation used during the 2008 financial crisis called the Commercial Paper Funding Facility (CPFF) to get credit directly to businesses. But the price the Fed is asking is far higher than it was in 2008 and may not do much to encourage prospective issuers or to anchor costs.

The rate to borrow both low- and high-grade 90-day paper – the longest maturity on offer – rose by about 20 basis points each on Thursday, according to two sources active in the commercial paper market. For overnight paper, the rate for lower-grade paper rose by 10 basis points, and by 5 for higher-grade paper.

There were some signs that stress was beginning to ease, however.

Overnight rates had also risen on Wednesday, according to Fed data posted Thursday, though the spread between overnight low- and high-grade rates, which had on Tuesday risen to the widest level since 2008, narrowed slightly.

Spread widening suggests investors are demanding higher premiums to hold risky debt.

The FRA-OIS spread , a proxy for risk in the banking sector, widened by 6.4 basis points on Thursday, though it was off the post-financial-crisis high hit on Monday. The widening spread this week has indicated that investors bet that companies will continue to draw on existing lines of credit at banks, potentially putting them under stress.

Companies including Boeing Co (N:BA), Hilton Worldwide Holdings Inc (N:HLT) and SeaWorld Entertainment Inc (N:SEAS) have drawn on lines of credit with banks in recent weeks.