UPDATE 2-U.S. ABCP market smallest since fall 2005-Fed
Thu Dec 13, 2007 12:58pm EST
By Richard Leong and John Parry

NEW YORK, Dec 13 (Reuters) – The U.S. asset-backed commercial paper market contracted to its smallest level since the fall of 2005, a symptom of ongoing global credit squeeze, Federal Reserve data showed on Thursday.

Asset-backed commercial paper (ABCP) outstanding fell $10.3 billion to $791.0 billion in the latest week from $801.2 billion the previous week, according to the latest Fed data.

Markets working to reprice risk, as hoped for buy the fed, as banks continue to take over lending from the wholesale markets.

This protracted shrinkage in the ABCP sector, which was a key funding source for subprime mortgages, has stemmed from corporate borrowers opting for cheaper financing elsewhere, analysts said.

The yield spread on ABCP has stayed stubbornly wide despite efforts by the Federal Reserve to bring down borrowing costs.

“You have some issuers who are not using (ABCP) conduits as much because of their wide spreads,” said Garrett Sloan, short duration analyst at Wachovia Securities at Charlotte, North Carolina. “You also have people sitting back from the one-month (ABCP) sector.”

Investors are demanding a 0.94 percentage point premium above the one-month London Interbank Offered Rate on one-month floating-rate ABCP. Prior to the credit crunch, they demanded no premium on these short-term debt.

Markets seem to be clearing at the wider spreads.

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