Overnight CP Costs Rise, Bill Yields Fall Amid Global Rate Cuts

Overnight corporate borrowing costs jumped, Treasury bill yields fell and the bond market remained all but closed after central banks worldwide cut interest rates, showing unprecedented government intervention was failing to aid companies struggling to finance themselves.

Overnight rates on dealer-placed commercial paper rose 56 basis points to 3.5 percent, while one-day yields on the debt backed by car loans and credit cards increased 43 basis points to 5 percent, according to data compiled by Bloomberg. Investors sought safety in three-month bills, whose rates fell as much as 26 basis points to 0.5 percent. Two issuers sold $750 million of U.S. company bonds this week, compared with the weekly average this year of $16.8 billion.

The coordinated rate cuts come as companies struggle to fund daily operations. The Federal Reserve joined the European Central Bank and four other central banks in lowering interest rates by as much as half a percentage point in a coordinated effort to unlock short-term credit markets.

``We've reached the point where so many of these government plans have fizzled that the reaction is reserved until we actually see the impact,'' said Christopher Low, chief economist at FTN Financial in New York.

Central Bank Cuts

The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point.

``The reality is there's no private sector balance sheet willing to step in so the Fed and the Treasury are becoming the only balance sheet,'' said Mark Kiesel, executive vice president at Pacific Investment Management Co., the manager of the world's biggest bond fund. ``In a market that lacks trust and confidence the private sector is on the sidelines.''

Today's rate cut follows the Fed setting up a fund yesterday to buy commercial paper, seeking to unblock the financing tool that drives everyday commerce for American businesses. The unit will purchase three-month dollar-denominated commercial paper at a spread over the three-month overnight-indexed swap rate.

``I don't expect any significant improvement until the program is up and running,'' Low said.

The $1.6 trillion market for commercial paper, which typically matures in 270 days or less, is used by companies to finance payroll, rent and other daily expenses. Issuers post the commercial paper rates they are willing to pay each morning. Average overnight rates on dealer-placed commercial paper soared to an eight-month high of 3.95 percent last week, from 2.08 percent less than a month ago.

Borrowing Options Dwindle

Corporate borrowing options have dwindled as the investment- grade bond market remained all but closed for a fifth week. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market's disruption.

General Electric Co. is offering to pay 1.25 percent on one- day paper, down 65 basis points from yesterday, according to data compiled by Bloomberg. GE cut the yield on 30-day paper by 45 basis points to 2.4 percent, the lowest in three weeks, Bloomberg data show. GE Capital, the finance arm of Fairfield, Connecticut- based GE, has $67.3 billion of commercial paper outstanding, according to Bloomberg data.

New York-based American Express Co., the biggest U.S. credit-card company by purchases, reduced its overnight offer rate 25 basis points to 1.75 percent. A basis point is 0.01 percentage point.

Libor Jump

Investment-grade bond yields yesterday rose to 7.98 percent, the highest since July 2000, according to Merrill Lynch & Co.'s U.S. Corporate Master index. Spreads relative to Treasuries widened 6 basis points to a record 514 basis points, more than five times their level in February 2007.

Before the global rate cut was announced, the London interbank offered rate, or Libor, that banks charge for such loans jumped 144 basis points to 5.38 percent, the third-straight increase, the British Bankers' Association said today.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 3.76 percentage points, after widening to as much as 4.03, the most since Bloomberg began compiling the data in 1984.

``I do believe over time policy will work,'' said Kiesel, who oversees $180 billion of corporate bonds in Newport Beach, California. ``The problem with all these measures is it operates with a lag and the deleveraging is real time. The deleveraging cycle is operating on a real time basis much faster than policy can overcome it.''

Preventing `Nasty' Recession

The world economy has already fallen into its first recession since 2001, according to JPMorgan Chase & Co. economists Bruce Kasman and David Hensley.

Global central bankers ``can't stop a recession,'' FTN's Low said. ``What they can do hopefully is prevent a really nasty recession.''

Money-market funds, the biggest buyers of commercial paper, began to flee the market three weeks ago, pushing yields to the highest since January and convincing the Fed yesterday to backstop the market.

Prime money-market funds have pulled $200.3 billion of assets from commercial paper since Sept. 16, the day after Lehman Brothers Holdings Inc. filed for the biggest bankruptcy ever, and built up their safer government debt holdings instead, according to IMoneyNet Inc., a research firm based in Westborough, Massachusetts, that tracks money funds.