When Traders Shun Commercial Paper: A Historical Look

Recently, the gap in yields between 3 month Treasury bills and 3 month commercial paper widened significantly. This is because traders and investors were doubting the ability of corporations to meet their funding needs. The resulting run for the safety of T-bills depressed their yields, creating a gap last week of 1.92%.

To put that into perspective, I went back to 1980 (N = 1444 trading weeks) and found that this was the widest gap during that time. Indeed, the second widest gap was 1.43%, registered during the market panic in October, 1987. The median gap since 1980 has been 1.09%, as commercial paper has traditionally yielded a bit more than Treasury bills to compensate for an additional dollop of risk.

When commercial paper yields much more than Treasuries, however, the market is pricing in far more than a dollop of corporate risk. Since 1980, we have had only nine weekly periods in which commercial paper yields have exceeded those of T-bills by 30% or more. Here are the dates in descending order of yield spread:

20070824
19871030
19871204
19871218
19820924
19871211
19981016
19820917
19821001

You can see that these dates really only represent four periods in recent market history: Fall, 1982; late 1987; October, 1998; and the present period. The first three were excellent long-term buying opportunities. Fading fears of corporate liquidity turned out to be an excellent strategy. Let's see if the recent panic is similarly kind to the bulls.

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