January 21, 2009 / 8:56 PM / 11 years ago

US commercial paper resilient after State St loss

NEW YORK, Jan 21 (Reuters) - The U.S. commercial paper market showed resilience on Wednesday, a day after State Street Corp (STT.N) reported a whopping $10 billion loss on these short-term debts and other investments.

The huge loss, which hammered State Street’s results and led to downgrades of its credit ratings, raised concerns about the sustainability of commercial paper’s recovery after last year’s carnage stemming from the global credit crunch.

For now, money market mutual funds and other large investors have not shunned these short-dated corporate IOU’s, like they did last September when Lehman Brothers collapsed and the money market was essentially frozen, analysts and fund managers said.

“There may have been a marginal effect, but it hasn’t been a big impact,” Amy Walkington, a portfolio manager with Horizon Cash Management LLC in Chicago, said of the impact of State Street’s grim results on the commercial paper market.

Interest rates on commercial paper were largely flat from Tuesday. The Fed lifted its purchase rate for top-rated three-month commercial paper for its Commercial Paper Funding Facility (CPFF) by 1 basis point on Wednesday.

Moreover, analysts cited greater confidence in commercial paper since the Fed introduced CPFF and other programs to prop up the $1.72 trillion sector, a vital source of short-term funds for daily operations at many companies.

“The government’s measures have largely mitigated those headline risks,” said Jessica Hoversen, fixed income market analyst at MF Global Research in Chicago.

Ironically, State Street earned money from one of the Fed’s money market programs. The Boston-based company said on Wednesday it made $60 million in interest revenue from acting as an intermediary under the Fed’s Asset-Backed Commercial Paper Money Market Liquidity Facility.

But that revenue is minuscule when compared with the $3.6 billion unrealized mark-to-market losses at the end of 2008 in the asset-backed commercial paper vehicles administered by State Street. That loss grew from $1.4 billion at the end of the third quarter of 2008.

State Street’s asset-backed commercial paper conduits are some of the biggest in the industry, according to analysts. Borrowers sell assets like mortgages and other loans to these vehicles and the conduit managers make money by selling securities like commercial paper backed by these assets to investors.

“The asset-backed commercial paper continues to do pretty well ... as long as administrators have demand for their commercial paper,” said Alex Roever, short-term fixed-income strategist at J.P. Morgan Securities in New York.

Indeed, the ABCP sector enjoyed a robust start in 2009. in early January, outstanding ABCP jumped $46.3 billion, the biggest single-week increase ever.

The Fed is slated to release its weekly commercial paper data early Thursday.

State Street’s ABCP woes curbed expectations of a smooth rebound in the CP market, but they will unlikely derail a recovery either, analysts and investors said.

“It hasn’t had an overriding effect,” said Deborah Cunningham, chief investment officer of money markets with Federated Investors Inc in Pittsburgh. “A single announcement doesn’t seem to have an impact like it once did.” (Editing by James Dalgleish)

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