When Will The Credit Market Thaw?

As you may have heard on our latest podcast, the commercial paper market is still stuck. Banks and large companies that want to borrow money short term are having a hard time.

So when will the market come back to life? Why are those lenders still skittish?

Well, I talked to a couple of them, and here's how they explained it:

Something like 40% of the money loaned there comes from money market mutual funds. Yes, those things you can buy at your bank. They're not very exciting — they pay a little bit more interest than a savings account. But collectively they amount to a huge pool of cash, over $3 trillion.

And the folks who manage money markets just are not eager to lend as much, as freely on the commercial paper market. They're willing to do super short — overnight loans, but not the longer stuff. Or they would be willing to lend, but at higher interest rates than the commercial paper market is interested in.

Why won't the money market funds do us all a favor and just lighten up? Well, put yourself in the position of Deborah Cunningham. She is chief investment officer at Federated Investors which manages $270 billion of money market investments.

Her responsibility is to the shareholders, the folks who lend them that $270 billion. Some are pension funds, or maybe your local banks.

"I have not heard any single one of them say they want more commercial paper," she says. "It's quite the opposite, they're asking 'What's your exposure? Are you increasing it? Decreasing it? Can you post it so we can view it on a daily basis?' "

So when will money market funds change their minds and get things moving again?

Cunningham says things in general will have to calm down.

Of course, one way to calm things down is for the money market funds to lend more on the commercial paper market.

"It is a bit of a vicious cycle," she says.

You can hear more about the stuck credits markets from her side of the fence, here.

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