As an increasing number of analysts evaluate the impact of Europe’s rolling defaults and failed auctions on Europe’s liquidity and particularly its shadow liquidity system, best seen in rising European Commercial Paper rates, is it about time to take a look at our own back yard. According to the Federal Reserve there is $673 billion in Commercial Paper maturing in the next 6 weeks alone, of which the bulk, Non-ABL Tier 1 CP amounts to $328 billion, ABL CP totals $292 billion, and Non-ABL Tier 2 CP totals $34 billion. What is concerning is that just like in Europe, rates here in the US for the various tranches of Commercial Paper have started rising. And as this is arguably one of the biggest components of the US shadow liquidity system, it bears close watching, especially if spreads continue leaking wider as they have recently. One thing to keep in mind: the Fed’ CPFF emergency facility has now been retired, and any hitch in the CP market will necessitate another brand new involvement in broad liquidity provisioning by the Fed. Then again, just as in the Central Bank liquidity swap case, which was reactivated on a moment’s notice, we don’t see any problem with the Fed announcing the CPFF program going live with no notice.
The chart below shows a maturity distribution of various CP tranches over the next six weeks.
And the recent rates on the three key CP tranches can be seen in the chart below. All three are trading at their 2010 wide levels.