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The Creeping Terror

Over the last few days I’ve noticed one significant thing. Creeping yields on U.S. commercial paper.

Prior to the financial crisis in 2008, rising yields on commercial paper were one of the first signs of trouble in the credit markets. Holders sold off paper to reduce their exposure to troubled businesses. As prices for commercial paper dropped, yields spiked.

Over the last year, yields have declined as buyers returned to the market. Everything seemed to be good again.

But there has been a notable rise in yields on longer-dated paper over the last month.
Yields on 90 Day AA Financial paper were holding steady around 0.2% for most of the last six months. Since early March, they've been creeping up to now stand near 0.3%.

US Commercial Paper - 90 day

90 Day AA Asset Backed paper also shows a notable increase in yield over the last month. Same with 60 Day Financial and Non-Financial. Even some 30 Day paper looks to have broken upward from trend.

US Commercial Paper - 60 Day

US Commercial Paper - 30 day

Initially, I thought the rise in yields might be due to FAS 166, the new rules that came into effect recently requiring U.S. banks to bring risky loans held in off-balance-sheet vehicles back onto their books. Giving investors a reason to sell out of paper issued by financial companies.

But the fact that yields on non-financial paper are also rising suggests this is something more systemic. Risk aversion is rising in all sectors.

This deserves some digging. I'm back home tonight and will be looking into it next week. More soon. In the meantime, have a great weekend.

By. Dave Forest of Notela Resources

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