Thursday, October 16, 2008
fed's CP program to crowd out private credit
Among the slew of details released by the Fed Wednesday was the information that it would set the yield it will pay for commercial paper at about 1.6 percentage points below the current average cost for companies. The special lending facility the Fed is setting up will finance short-term notes at 2.2% yields at current rates and 3.2% after fees. According to Bloomberg data, that discount cuts the cost of cash to 2.2% from 3.7% for a giant like General Electric Co. and from 4.7% for Citigroup Inc.
While the lowered costs may be great for the corporations, they could have the unintended consequence of shutting private buyers out of the market as the companies can get better rates from the government than from the traditional purchasers the program is trying to lure back.
which means that the fed will quickly dominate the commercial paper market the way it now does the interbank lending market -- with the result that those brave souls (read: money market funds) willing to buy CP to finance short-term corporate debt will have to find another place for cash. i suspect demand for t-bills will only get heavier.