Overnight Commercial Paper Rates Rise as Bank Bailouts Spread

Oct. 6 (Bloomberg) — Corporate short-term borrowing rates soared as bank bailouts spread through Europe and the Federal Reserve committed to doubling its auctions of cash to banks to as much as $900 billion to unfreeze short-term lending.

Yields on overnight U.S. commercial paper jumped 0.94 percentage point to 3.68 percent, according to data compiled by Bloomberg that stretch back to January 1996. That’s the highest since Sept. 30, after the U.S. House of Representatives rejected a federal plan to rescue banks.

Borrowing costs are rising after European leaders meeting in Paris over the weekend pledged to bail out their own nations’ banks, stopping short of a regional rescue. The Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each, the Fed said.

“I’d love to see the Fed cut rates in addition to its actions today,” said Tony Crescenzi, chief bond strategist and chairman of Miller Tabak Asset Management in New York, which manages almost $100 million of municipal securities.

Companies sell commercial paper, which matures in nine months or less, to help pay for day-to-day expenses such as payroll and rent.

The German government backed a 50 billion-euro ($68 billion) rescue package for property lender Hypo Real Estate Holding AG and U.K. Chancellor of the Exchequer Alistair Darling said Britain will “do whatever it takes” to help its banks.

Financial Paper

Commercial paper outstanding tumbled $94.9 billion, or 5.6 percent, to a seasonally adjusted 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, plunging $64.9 billion, or 8.7 percent, to a two-year low.

Money-market funds are pulling back from investing in unsecured commercial paper from banks, JPMorgan Chase & Co. analysts led by Alex Roever in New York wrote in a report dated Oct. 3. High-grade non-financial corporate issuers are still able to roll their commercial paper, the analysts wrote.

The Fed will cut its key interest rate by at least half a percentage point at its Oct. 29 meeting, according to futures on the Chicago Board of Trade.

The futures show 54 percent odds of a 75-basis-point-cut in the 2 percent overnight rate, and a 46 percent chance for a half- point reduction. A basis point is 0.01 percentage point.

President George W. Bush signed the $700 billion bailout into law on Oct. 3, after the House approved the plan with a second vote.

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