By Saskia Scholtes in New York
Money market investors are emerging as drivers of the latest global financial drama, roiling credit markets and hurting corporate borrowers by shunning commercial paper and piling into short-term US government debt.
Yields on short-term Treasury bills last week made their biggest two-day fall since the “Black Monday” stock market crash of October 1987, as spooked commercial paper investors sought to put money in the safest and most liquid short-term assets.
Friday’s extraordinary conditions in money and bond markets led the US Federal Reserve to intervene, making direct loans available to cash-strapped banks on more favourable terms and signalling that it would cut its main interest rate if necessary.
Tony Crescenzi, a strategist at Miller Tabak, said the plunge in yields was a result of bets on Fed rate cuts and a flight to quality, and that the demand for bills was “accentuated by shifts out of commercial paper”.
Money market funds are important buyers of highly-rated short-term debt such as commercial paper, which has accounted for the largest share of their holdings. However, they have changed their strategy in recent days.
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