News article analysis

 

Example of News article analysis

RSM 230 Financial Markets – Booth – Monday 6 to 8pm

Full Name                                     Student Number

Sally Student                                                    123123123

MONEY MARKETS-Basel III may pose headwind for US CP market

Wed Sep 29, 2010 3:09pm EDT

* Basel III may be a headwind for commercial paper market

* CP market has mostly contracted in recent weeks

* Dollar-denominated interbank lending rates rise slightly

 

By John Parry and Chris Reese

 

NEW YORK, Sept 29 (Reuters) – Dollar-denominated interbank

lending costs rose marginally on Wednesday, while investors

looked ahead for the release  on Thursday of Federal Reserve

data on the size of the U.S. commercial paper sector.

The data could give clues to the health of short-term

lending markets.

The commercial paper market has contracted for four out of

the past five weeks and is now about half its peak size of $2.2

trillion outstanding in summer 2007 when the credit crunch

started.

The market was severely eroded as investors lost confidence

in short-term paper issued by companies and banks, fleeing to

safe haven Treasury bills instead. Commercial paper may take

many years to recover from that upheaval, analysts expect.

Now, global regulations are threatening to further curtail

the commercial paper sector.

Strategists warn that the Basel III rules on banks capital

ratios could make it more expensive to hold commercial paper

and deter issuance.

Basel III “is another headwind for the commercial paper

market” because the new regulations are creating uncertainty,

said Sean Simko, fixed-income portfolio manager with investment

management company SEI in Oaks, Pennsylvania.

Since last year, companies and banks have issued more

longer-term corporate debt at historically cheap borrowing

rates, seeking to reduce the reliance on short-term paper,

which contributed to the demise of some major financial

institutions in the crisis.

“Basel III’s liquidity coverage ratio has potential to

significantly impact the CP market,” wrote Alex Roever,

short-term fixed income strategist with J.P. Morgan Securities

in New York in a Sept. 25 research note.

That’s because the new rules would require banks to hold

liquid assets against facilities that backstop some commercial

paper programs, raising the cost of these facilities, Roever

said.

“The combination of higher CP backstop costs and low,

long-term interest rates could cut CP outstandings in half by

the end of 2011,” Roever wrote. Low long term rates will induce

more issuers to sell longer maturity corporate bonds instead of

commercial paper, much of which matures within 90 days.

“One of the implications of the liquidity coverage ratio is

it will require banks to hold more liquid assets,” which will

likely induce banks to buy less commercial paper and step up

their purchases of Treasury bills, notes and bonds instead,

Roever said on Wednesday.

Meanwhile, interbank dollar borrowing costs rose for the

first time in two weeks on Wednesday on increasing expectations

the Federal Reserve will eventually embark on further

quantitative easing to boost the economy.

The gain in dollar-denominated interbank lending rates was

modest, however, and they remained anchored near levels

entrenched since the end of August.

Three-month dollar Libor rates USD3MFSR= were fixed on

Wednesday at 0.29000 percent, just up from 0.28938 percent on

Tuesday and remaining just below 0.3000 percent where they have

held since August 26.

More analysts are becoming convinced the U.S. central bank

will resume quantitative easing beyond a current program under

which it buys Treasuries using funds from maturing agency bonds

and mortgage-backed securities in an effort to keep steady the

Treasury’s holdings of domestic securities.

The Fed’s policy statement released last week “appeared to

signal a move toward more quantitative easing,” said Paul

Dales, a U.S. economist at Capital Economics in Toronto.

A Reuters poll conducted last week after the U.S. central

bank’s policy meeting found the number of leading Wall Street

economists predicting more quantitative easing edged higher,

with 10 of 16 primary dealers who responded to the poll saying

easing was likely. [FED/R]

 

(Editing by Kenneth Barry)

 

 

 

Summary and Importance of the Article:

This is an example of an article analysis. The article discusses how two factors affect the decline of the commercial paper market. Firstly, the Basel III liquidity requirement forces banks to offset their purchases of commercial paper with liquid assets. This is an extra cost for banks to incur, which is why banks buy less commercial paper (non-liquid asset), and more of the safe treasury bills (liquid asset). Secondly, since long term interest rates are low, companies would rather borrow long term and pay low rates than borrow short term (issue commercial papers). Therefore, companies issue less commercial paper. Also, the article mentions that the general level of the investors’ confidence in commercial paper has declined, causing people to demand more treasury bills, which is a safer investment than the commercial paper. Then, the article discusses how the central bank is likely to use quantitative easing to ease the commercial paper market. Since the interest rates are rising, the central bank is likely to use quantitative easing, and buy more treasury bills, such that the domestic holding of treasury bills declines.

The article is relevant to our discussion in class, because it is a strong reflection of the money markets. It discusses how any headwind in the commercial paper market makes people “flee to the safe haven of treasury bills”. It also expands on how other forces may affect the size of the commercial paper market, such as liquidity requirements or low long term borrowing rates. Lastly, the article discusses quantitative easing, which was mentioned in class. The article also shows how the central bank may use quantitative easing to keep the treasury market stable. This article is directly related to the class discussion, and gives more insights into policy making and the current money market situation.


 

 PRESENTATION SLIDE 1- example of PowerPoint slide pasted as picture

PRESENTATION SLIDE 2- example of text only

 

Importance of Article/Relationship to Class

 

  • Money markets were discussed in class
    • Commercial paper and Treasury bills are key components of the money markets
  • Factors affecting demand for CP and T-bills:
    • Investor confidence
    • Relative risk between corporate and government securities
    • Forces that may affect demand in the future include bank liquidity requirements and low long-term borrowing rates
  • Provides insights into central bank policy decisions
    • Quantitative easing likely to resume to support the economy

 

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