Commercial Paper, T Bills and Eurodeposit Rates
Commercial Paper was introduced as a variable interest rate employed as a means to rebuild America after the Civil War in the 1860’s. Due to its variable interest, Commercial Paper was the trade able interest rate 50 years prior to Federal Reserve introduction, 55 years prior to Fed Funds introduction, 65 years prior to T Bill introduction, 57 years prior to FED Open Market Operations, 30 years prior to Dow Jones Index introduction and long before consideration was given to nation to nation interest rates. Commercial Paper interest would later assist to build yield curve maturities and cross border deposit rates such as Libor, Euro, money market and other deposit rates such as Certificate of Deposits. Commercial Paper assisted in later introduction of General Collateral interest rates.
From the 1860’s, Commercial Paper funded Freight shipments, Freight Insurance, passenger services, research, inventions, travel . The list to fund successful growth under pure capitalism is endless. As corporations formed and grew from 14th amendment Supreme Court recognition as persons, Commercial Paper funded Receivables, Inventories, bank operations, Finance companies, Loans, broker dealer operations, money market and mutual funds. Again the list is endless. As Commercial Paper, corporations and other markets developed, Commercial Paper was split into two main sections and hold as traded markets today: Financials and Non Financials. Most important inside the US is Non Financials while most important for corporations and offshore locations is Financials.
To offer what the vital import of Commercial Paper means to markets and traders, Kacperczyk and Schnabl provide solid statistics as they viewed Commercial Paper in terms of the crisis in a NBER paper, ” When Safe Proved Risky”.
In 1990, the size of Commercial Paper markets were USD 558 billion and grew to 5 trillion by 2007 with 1.97 trillion outstanding. Financials V Non Financials accounted for 40.1% of the market while asset backed Commercial Paper accounted for 56.8%. The corollary was the $ 940 billion T Bill market. Not much changed today as the CP main, most important, most vital Finance Rate. Consider Friday Fed Funds volume was USD 61 billion, dead closed as usual at 0.37 and a tiny fraction of the Commercial Paper market. Consider the impending 2008 crisis was first seen long before in the Commercial Paper market.
Like T Bills, Commercial Paper is issued at a discount, redeemed at face value yet exempt from SEC registration. Long maturities are maximum 270 days yet average durations are 30 day deals. Consider a 30 day deal at 100,000 face value purchased at 85,000 offers Bond Equivalent yields annualized at 214%, 107 % semi annual and 53% quarterly. Interest is not exempt like T Bills and its why Commercial Paper both Financials and Non Financials trade between T Bills and Libor. Current Commercial Paper rates trades between T Bills and Eurodeposit rates and informs correct positioning.
While the focus remains on Fed Funds as insight into Fed hold or raise, Fed Funds and Libor rates rarely move. What is known regarding FED Funds from a recently posted article is Fed Funds rates are overbought to 10 year monthly averages and bumping against 95% bands on a vast majority of the 10 year averages. Eurodeposit rates as a proxy to Libor remain in the same unmovable and overbought condition as Fed Funds.
To understand unmovable Libor is to know Commercial Paper Financials is the location for US subsidiaries offshore to borrow, lend and fund current business. In current 1 month terms, Commercial Paper Financial rates are 0.43 V Eurodeposit rates at 0.48. Not bad for GE, Toyota, GM, automobile and manufacturing companies and others offshore in need to Finance operations. To understand the proper health of Fed Funds, Financing abilities, rates and DXY as an extra added feature is to view Finance Rates in Commercal Paper.
Commercial Paper Financials and Nonfinancials, T Bills and Eurodeposit rates were viewed in successive 1 month averages 1 to 8 years out to 2008 or 96 months. The commonalities are 1 year averages drive prices in every financial instrument. Every financial instrument should trade at maximums 15 to 23 basis points lower. Averages 2 – 7 years in every financial instrument are massively overbought to the 99% and beyond bands. All averages are beyond maximum peaks but rather at massive significant points. Eight year averages support current prices except Eurodeposit rates at 0.53 against current 0.48. Commercial Paper 1 month Financials are most overbought followed by T Bills, Commercial Paper Non Financials then Eurodeposits.
Commercial Paper 1 month Non Financial averages varied from 1.3% lows to 1.8% highs while 1 month Financials varied 1.2% to 1.7%. T Bills varied from 1.02% to 1.2% while Eurodeposits varied from 2.1% to 3.10%. T Bills in terms of averages are farily lifeless as the variation fails to explain its high signal except in the 8 year average where its revealed 0.147 is fast approaching bottoms. What variation reveals is inside current prices in all financial instruments is pure noise, unexplainable, a meaningless price, a lost meandering ship.
Commercial Paper Financial and Non as well as Eurodeposits can all handle the overbought correction however all 3 are the rates to watch closely as insights to Fed Funds because prices are near bottoms. One aspect to the Peak problem is explained by 8 years of averages without movements.
Targets in Commercial Paper 1 Month Non Financials are located from 0.18 to 0.23 from current 0.33. Current price is supported by the 8 year average at 0.25 and 1 year at 0.19. Commercial Paper Financial targets are located from 0.20 to 0.36 from current 0.43. Current price is supported by the 8 year average at 0.29 and 1 year average at 0.22.
T Bills from current 0.25 targets 0.11 to 0.20. Current price is supported at the 8 year average at 0.147 and 1 year at 0.10. Eurodeposits from current 0.48 finds resistance in the 8 year average at 0.53 and targets are located at 0.32 to 0.43. Price is supported at the 1 year average at 0.30 followed by the 7 year average at 0.28 then 6 year at 0.26 and 5 year at 0.25. Eurodeposits at 0.48 is not only bumping against 0.53 at the 8 year average but also bumps against the Fed headline at 0.50. Doesn’t seem likely Eurodeposits can trade higher than headline at 0.50 without a further rate hike from Yellen.
The basis of this story is shortest term interest rates including Fed Funds are miles overbought and in dire need of corrections. Corrections may mean bottoms are here. Commercial Paper interest rates are guides to Fed Funds rather than Fed Funds itself as exclusive focus. Commercial Paper rates actually see movements because its a far larger market made of much more sophisticated dealers and investors. Normal deals begin at $100,000 and $250,000. Is overbought worth thr risk to commit further cash and to a lost price. Can Yellen raise under overbought interest rates, must a correction come first, will prices correct by June.
Typically central banks move when interest rates reach oversold or overbought but hardly move when a price is range bound. They all watch prices daily. Interest rate movement is a wholesale change and central banks don’t like change. I’m still not convinced Yellen is ready to move Fed Funds higher unless bottoms and oversold are seen.
Brian Twomey, Inside the Currency Market, btwomey.com