Tight Credit Market Driving Up Corporate Financing Costs

Posted by Tim Hope on 9/18/08 10:07 am

For the week ending September 17th, the U.S. commercial paper market has shrunk by 4.2% the largest such decline in 26 years.  Commercial paper is a major source of short term corporate financing.  The tightening credit conditions can clearly be seen in the increased borrowing costs for corporations.  Consider that overnight rates on commercial paper increased by 1.38 percentage points this week for a rate of 3.46%.  The 30 day rate has moved 73 basis points higher to a rate of 3.1% (each percentage point represents 100 basis points).  While at the same time, three month Treasury bill yields have fallen to levels not seen in half a century.  In light of some money market funds that are struggling to maintain their one dollar NAV, such an increase in commercial paper rates can be seen as yet another signal that market participants lack confidence in anything but direct obligations of the US government. Click here to read more

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