Finally Some Good News: Commercial Paper Rates Slide, FX Basis Improves

After the Fed went into full panic mode, unleashing at least two of the crisis measures that were first launched in the depth of the Global Financial Crisis, which however failed to ease either the dollar shortage, with the Bloomberg dollar index surging to 3 year highs and the FRA/OIS blowing up again...

... or investor fears, as can seen in the crashing stock market after Mnuchin bizarrely decided to terrify everyone with his prediction of a 20% unemployment rate, we do note two tentative signs of improvement: first and foremost, three-month AA rated commercial paper rates for financial and non-financial companies eased on Wednesday after the Fed announced it would restart the CPFF crisis-era program to ease strain in credit markets. To wit:

  • Three-month AA financial CP rate fell to 1.25% on March 17, from 1.35% a day earlier
  • Three-month A2/P2 non-financial CP fell to 2.53%, from 3.04% a day earlier

It wasn't all good news, and confirming that the Fed's money has yet to reach all parts of the paralyzed Commercial Paper market, 3-month AA non-financial CP rose to 1.65% on March 17, from 1.34% a day earlier, indicating that money markets remain are still on the verge.

Also overnight we received confirmation of FX swap line usage, with global central banks announcing take-up as the BoJ provided $30BN in its 84-day operation and $2BN in its 7-day operation while the ECB provided $76bn in its 84-day operation and another $36bn in its 7-day. This substantial take-up, coupled with various banks announcing they were willing to access the Fed’s discount window, resulted in a sharp drop tightening in yet another key funding stress indication, i.e., the FX basis, with 3M FX OIS in both EURUSD and USDJPY tightening dramatically.

And while there has been some improvement in CP and FX swaps, stress still remains in the system with both FRA/OIS and LIBOR still rising (potentially on counterparty worries).

Commenting on the reversal, hopeful Wall Street analysts predicted that the most acute pressures on the FX basis have likely passed, absent another large shock to the system. The question is when will this easing in funding stress finally spill over to the broader market.