Guest Post: How Commercial Paper Prices In Economic Recession

Tyler Durden's picture

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How Commercial Paper Prices In Economic Recession

In what is becoming a multi part series on how various products price in recession tonight it is time to check out the commercial paper markets. Below are two charts (1) showing the last two recessions and how commercial paper rates performed and (2) commercial paper rates since Q2 2009. Both charts utilize non financial AA rated 30 and 90 day terms.  The results were similar for financial paper as well.

Commercial paper seems to be an excellent market timer of economic recession. Notice the last two periods where rates began falling precipitously and the timing of economic contraction. 

It is also interesting to note prior to the 2008 recession rates began moving higher as the economy expanded.  Since the 08 recession theoretically ended no such move up in rates has occurred.  Whether that is the reality that no real expansion has occurred and or simply an abundance of liquidity in the market is unclear.

To capture changes in commercial paper rates since Q2 2009 a zoomed in chart is presented below.  Again notice the fall off in rates albeit from lower levels and the corresponding move lower in GDP.

A similar pattern has developed where rates on 90 day paper have fallen from 34 to 14 basis points and GDP appears to be trending lower.  What's "different this time" is the starting point of GDP versus the June 2009 drop off in rates was about 3% higher in real GDP terms. 

Should GDP respond to changes in rates as it did in late 2009 then economic contraction is highly probable in 2011.

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SheepDog-One's picture

How does paper price in a global systemic collapse?

Doyle Hargraves's picture

The only price that matters at that point is physical PMs and food bitchez!

Missiondweller's picture

With negative short term interest rates as it did in 2008.

10kby2k's picture

5 year TIPS says it all -0.50%

do you want to lose 1/2% plus the amount inflation is understated OR do you want to buy stocks ???

shitty choices-----no wonder the rush to commodites (cattle futures anyone, i can't stash the physical in my garage. oh yea, obama will buy me a ranch to store them with his making houses (and ranches) affordable program)

smlbizman's picture

does anybody remember the good ole days when the "prime" rate mattered...for 20 bonus points without looking it up...what is the current prime rate? 


and should we be concerned?

Bob's picture

Wouldn't put it all into silver and lead quite yet, dawg.  We're a biased group of people . . . however well-supported in our beliefs as you might argue us to be, we scream into a terrific headwind that, well, not everybody sees.

They could keep this shit going for another ten years.  Just sayin'. 

There is No Spoon's picture

This analysis ignores the effects of ZIRP which are pretty clear on the first chart.

MacroStory's picture

What ZIRP did was lower rates across the board and still in that context CP rates have fallen considerably.  In fact with QE ending rates have fallen.  Additionally money markets are seeing net withdrawals which further should cause CP rates to rise but they are not.  Point being I see no demand in this economy for CP and thus no growth in this economy beyond government spending.

jus_lite_reading's picture

Just a small increase could shift the whole paradigm into reverse..... pay those who borrow money from you..... oh PIGS fly!!!

slaughterer's picture

The trend in rates is hard to identify in such a compressed range.  But your point is well taken.

10kby2k's picture

ZIRP is here to stay. We make money the old fashioned way.....we steal it!!!!

sasebo's picture

How does this tie in to ZIRP timing wise?

cosmictrainwreck's picture

well, I don't know about the paper, but the Dow prices it in as "to the fuckin' moon, baby!" oops, I said in a recession; forgot we're NOT in one... my bad

Greeny's picture

Yeah, blah, blah, Collapse people get pissed Market up 60

points again. I think tomorrow ADP will surprise and we'll take

out recent highs.. Told you buy stocks and stop whining :))))

slaughterer's picture

Greeny, what are the diacritical marks that tell us if you are being ironic in the previous message or not? 

SheepDog-One's picture

Greeny the degenerate gambler tries to get everyone else to join him as all alchies and other degenerates always work to get their buddies to become drunks too. Misery loves company. Either that or hes another planted sellside shill.
Greeny, have fun buying your 100 P/E joke stocks, just not for me pal, I dont care HOW much theoretical money you could make. Have fun shillboy.

Nathan Smith's picture

I was selling paper on Sep 19, 2008 for an A1P1 company, and there was no 30 day or 90 day available at any rate.  In fact, there were NO term deals.  The only paper was o/n and those rates shot up to 8% by the end of that week.

I am not sure what the difference is between AA and A1P1, but I can't imagine that something similiar didn't happen in that funding market during 2008.

squexx's picture “(Martin Armstrong) The man who called the ’87 crash is now calling for a long-term market rise”

SheepDog-One's picture

'Long term market rise' OK only way that can happen is if the dollar takes a massive nosedive...good luck with all that, degenerate gamblers.

moneymutt's picture

Steven Keen and others are claiming debt acceleration or deceleration coorelate with GDP even if you still have debts contracting, if you manage to slow down the rate at which debts contracting, you will have a positive impact on GDP, and if debt is expanding, but acceleration rate decrease, GDP goes downward...

So I find it interest when simple ole rates on commercial paper flatten, the GDP goes up, the slope of the rates line seems to be the important issue

wombats's picture

Why is anyone investing in commercial paper at such pitiful rates?  It sure makes gold/silver look attractive in comparison.

SheepDog-One's picture

Gold and silver in your safe = total safety knowing your assets are not within the reach of the grubby claw hook fingers of the central bankster cabal. Everything else youre just trusting your best interest to these gangster criminals, insanity.

sellstop's picture

I just threw away another credit card application that came in the mail. I've noticed a lot more of them the last few months. What does that mean?

Are lenders willing again?

If so it is only a matter of time before lendees take them up on their offers....

Has anyone out there notice an increase in credit solicitations lately???



sellstop's picture

I just threw away another credit card application that came in the mail. I've noticed a lot more of them the last few months. What does that mean?

Are lenders willing again?

If so it is only a matter of time before lendees take them up on their offers....

Has anyone out there noticed an increase in credit solicitations lately???



Illusory logic's picture

yes, I've noticed I have received a lot of offers lately from 2 large east-coast based banks.  wife and I got 5 between us in the last 2 days!

but don't throw them away!  use that nice postage-paid envelope they give, then stuff it with the disclaimer and rate legal BS sheet they include.  then mail it back to them!  it takes money away from them for postage (ok, probably my money via the TARP, QEx, whatever) and gives it to the Postal Service.  Hey, at least the USPS tries to act like a legitimate business.  the mail at least goes to a US based address, so maybe it might employ a minimum wage worker to open it, or at least run the machine that do that!  and there you go!  a little bit of stimulus!