Interest rates on unsecured commercial paper, an important source of short-term funding for banks, have reached the highest levels since the Great Recession, raising the possibility of a credit crunch and further regulatory intervention.
Rates for 90-day unsecured commercial paper maturities topped 5% on March 30 for the first time since September 2007, according to data from the Federal Reserve. The data also shows banks moving towards shorter obligations to obtain discounts from money-market investors hesitant to purchase longer-dated issuances.
Average monthly issuances in March rose 11% compared to the end of January. During the same period, one-to-four day issuances rose 27% and maturities dated more than 10 days fell 87%.
Overall, the $568.2 billion unsecured commercial paper market has shrunk 15% since the beginning of this year, according to the Fed's data.
Unsecured issuances account for half of the $1.1 trillion U.S. commercial paper market. Asset-backed and non-financial securities sold by corporations comprise around a quarter of the market each.
U.S.-based subsidiaries of foreign banks are the primary issuers of unsecured commercial paper, selling debt obligations based on their creditworthiness to meet near-term funding requirements. Maturities can extend up to 270 days, but most become due within three months.
While unsecured commercial paper rates have increased in
After Silicon Valley Bank's collapse last month, which led regulators to take over Signature Bank in the U.S. and forced a sale of Credit Suisse in Europe, investors will seek to limit risks by shortening the tenors they're willing to purchase, according to Stephany Bushweller, a managing director leading commercial paper trading at MUFG Securities Americas.
"When in doubt, go short," Bushweller said during an interview. "We certainly saw that throughout March."
Last month, as markets absorbed the failures of SVB and Credit Suisse, one-to-four day trades increased from 84% of total unsecured issuances at the beginning of March to 93% during the last week. Rates on the same maturities rose 15 basis points to 4.8% while 90-day rates increased 23 basis points to 4.97%.
"In times of market stress, the short end of the curve tends to get shorter. The market has remained liquid but at a price," Bushweller said. "We were hoping that market instability was going to be over, but I don't think it's quite over yet."
Since SVB's collapse in early March, the benchmark spread for unsecured commercial paper issuances have widened by around 20 basis points, according to Nafis Smith, who heads taxable money markets at the investment manager Vanguard.
But weekly liquidity levels are "adequate" and the firm "never saw broad-based selling" in prime commercial paper funds, Smith said in an email.
"Within roughly a week or so of SVB's collapse, as the market became more comfortable with the idiosyncratic nature of some of the banking sector issues, investors became more comfortable with longer-dated securities," Smith said. "Investors are now dipping their toes back in."
For a comparison, he added, the same benchmark spread widened by 125 basis points in 2020 amid volatility at the onset of the pandemic and by 228 basis points throughout the recession.
One action the Fed may take to stem further tightening in the commercial paper market is to relaunch a funding facility the central bank opened during previous periods of volatility.
A spokesperson for the Federal Reserve Bank of New York declined to comment.
After the Fed's
"The failures of SVB and Signature Bank are leading to a broader credit crunch," Klein said. "And the Fed has an itchy trigger finger for bailouts when markets seem to indicate that institutional investors are going to lose money."
Questions about the durability of community banks' customer bases and funding costs could dominate first-quarter earnings calls following the downfalls of Silicon Valley Bank and Signature Bank.
Another category of the commercial paper market - asset-backed issuances - played a central role during the last financial crisis.
In August 2007, after two Bear Stearns hedge funds filed for bankruptcy, BNP Paribas halted withdrawals from three of its money-market funds after investors learned that subprime mortgages served as collateral for the asset-backed commercial paper issuances.
The following year, the Reserve Primary Fund announced it "broke the buck" by suffering significant losses on commercial paper issued by Lehman Brothers, which led to widespread withdrawals from the money-market sector.
Lisa Singman, a senior credit officer at the credit ratings agency Moody's, said that the asset-backed commercial paper market has so far remained more stable than unsecured issuances after last month's volatility.
In recent weeks, longer-dated maturities have decreased slightly but are still a sizable portion of the market's new issuances.
"Companies that sell through the asset-backed commercial paper market are smaller players seeking cheaper financing," Singman said. While rates have increased, it's still likely to be "more beneficial" for those companies to obtain short-term funding from the market versus taking out a loan from a bank, she said.
