Tuesday, October 7, 2008

Fed to Buy Commercial Paper

Commercial paper refers to short-term bonds used by corporations for quick cash to cover temporary deficits. Typically it has a term of about a month with 3% interest, and historically has been regarded as "safe as cash."

Auction rate securities are one kind of commercial paper discussed before, which were floated by the financial industry, who cycled short-term bonds at low rates to fund long-term mortgages at higher rates. The failed auction-rate security system is now subsidized by TAFs, PDCFs, and TSLFs, arranged by the Fed and underwitten by the U.S. tax base.

Today, the Fed announced it would start to buy commercial paper from outside the financial industry. This market is drawing fewer investments from fund managers, and American businesses need it to operate. This was just an announcement; how much the Fed was willing to buy per business or aggregate was not disclosed.

No comments: