The Federal Reserve has extricated itself from yet another corner of the credit markets.
It cleared out the last of its holdings last week in the Commercial Paper Funding Facility, or CPFF, a program established in the depths of the 2008 credit crunch when companies had trouble obtaining short-term loans called commercial paper.
Investors are now willing to lend to companies that rely on this type of funding to pay their employees and landlords and to stock inventory. Their need for such funds has fallen in the weak economy, and many have found more attractive rates in the longer-term corporate bond market.
The "vast majority" of issuers who used the program "have been able to fund in the market for quite some time now," said Chris Conetta, the head of U.S. commercial paper trading at Barclays Capital in New York. The program, he noted, "accomplished all the goals it set out to achieve, namely, buying issuers time till the market stabilized."
On Thursday, the central bank said it no longer has any funds in the CPFF, which stopped lending on Feb. 1. When it was started in October 2008, investors were so skeptical of companies and the collateral they offered that they were reluctant to lend. This made it difficult for businesses to fund their operations, so the Fed said it would make short-term loans available — albeit at high rates of interest — until investor confidence returned.
Within days of opening, the CPFF held $350 billion. The total began to dwindle once companies found private buyers for their debt and could get better rates in the corporate bond market with the help of another government effort, the Temporary Liquidity Guarantee Program. These bonds had two- or three-year maturities, compared with the maximum of 270 days for commercial paper.
Companies that tapped the CPFF included General Electric Co., American Express Co. and American International Group Inc.
For its part, the Fed said that the CPFF "succeeded in its objective of restoring liquidity" in the commercial paper market, "thereby supporting the flow of credit to the U.S. economy to the benefit of both businesses and households."
Still, some borrowers, mainly those selling asset-backed commercial paper, are struggling to find buyers, industry participants said. The amount of asset-backed paper fell to $410 billion at the end of March, from $450 billion at Dec. 31, said Fitch Ratings Inc.
"We don't see the precipitous declines anymore, but we also don't anticipate significant growth," said Michael Dean, a managing director at Fitch.
Unless the economy strengthens further, the overall commercial paper market will continue to contract. It is currently $1.109 trillion in size, half its peak of $2.2 trillion in July 2007.
For the past two weeks, some growth has been seen, hinting at returning strength. Last week, the sector grew by $20 billion after an increase of $9.6 billion the previous week.