Saturday, October 11, 2008

Can the Economy Run At These Rates of Interest

The A2/P2 rates are ... nasty; but, if you did not know the history of this series and someone asked you off-hand if the U.S. Economy could "run" at these rates of interest, would you say, "yes"?

Probably would, right?

The fact that financial paper, typically the most sound, is yielding more than non-financial ... continues to suggest that banks are a locus of the problem.

The A2/P2 rates are perplexing, to the extent that these rates don't just represent problems at a few large borrowers but the whole market and broadly representative of all rates paid, not just those measured.


If money-market funds have pulled back from CP, irrationally, even after the Fed has guaranteed all money markets, then the Fed could use some moral suasion to get the market going again...

Either that, or someone has to make the case why credit-risk *ought* to be priced so much higher, right now.

FRB: Commercial Paper Rates and Outstandings
Discount rates
[nb. CP discount rates are not readily comparable to annualized bond rates]

Term AA
1-day 1.52 5.24 1.71 3.97
7-day 1.48 5.85 2.02 4.22
15-day 2.30 6.05 2.36 4.23
30-day 1.65 6.24 4.01 4.33
60-day 1.75 6.21 3.51 4.14
90-day 2.12 n.a. 3.82 4.66
Trade data insufficient to support calculation of the 90-day A2/P2 nonfinancial rate for October 9, 2008.

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