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Commercial paper market rates at record lows

Alisa Roth Aug 16, 2010

Commercial paper market rates at record lows

Alisa Roth Aug 16, 2010


Kai Ryssdal: You have heard or seen stories about borrowing costs all over the place the past couple of months. I know you have here. That with interest rates at all-time lows, this is a great time to get a loan. We were talking about home owners and mortgages on the broadcast the other day. Now, it’s companies. Corporations that are borrowing money for short periods, in what’s called the “commercial paper market,” are paying less than a third of 1 percent interest. It’s a huge change from the fall of 2008 and the heart of the financial crisis, when commercial paper basically dried up.

Marketplace’s Alisa Roth reports now from New York.

Alisa Roth: Companies use these short-term loans for daily needs — things like paying workers or vendors. The loans can be as short as a day or as long as nine months. But either way, they’re considered very safe — partly because only companies with very high credit-ratings can borrow this way. Corporations like Google and Merck have been taking out lots of them lately.

David Scharfstein is a finance professor at Harvard Business School. He says in Google’s case, it’s acting like a bank.

David Scharfstein: They’re borrowing short-term in commercial paper market and lending out long-term, taking advantage of the historically high gap between ST rates and LT rates.

In other words, Google doesn’t need the money. But it sees an opportunity, because it can borrow from the market cheaply. And lend out its own cash at a higher interest rate.

There’s another reason to use the commercial paper market right now. Chris Whalen is at Institutional Risk Analytics. He says companies want to make sure they can borrow when they need to. One way to do that is to take out these short-term loans, just to show that you do pay them back — the way people sometimes borrow money, just to build a credit history.

Chris Whalen: It’s never a bad thing to establish a market for your paper and get investors used to holding it, in case you need it.

During the financial crisis, the commercial paper market froze up, along with every other credit market.

Charles Calomiris is a professor at Columbia Business School. He says it used to be when companies borrowed this way, it was because they couldn’t get money from the banks.

Charles Calomiris: Now, however, people are starting to understand that the most credit-worthy corporations are going to weather this storm, they’re coming out of it.

He says investors are starting to look at commercial paper as an opportunity. They’re more sure about these companies’ futures, so they’re willing to take on a little more risk.

In New York, I’m Alisa Roth for Marketplace.

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