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Commercial Paper Market Begins to Stabilize

In a very positive sign that the credit crunch may be easing, the volume of asset-backed commercial paper grew after declining for 20 straight weeks. Companies issue asset-backed commercial paper to fund short-term operations. The market slowed down this summer because a lot of Structured Investment Vehicles had been issuing short-term paper to fund their investments in sub-prime mortgage-backed securities. That led to a lot of skepticism about the market. The fact that the volume is going up, then, is a step in the right direction.

Still, analysts are preaching caution.

Analysts said the first sign of stabilisation in the market since the summer was good news. But there was a sense of caution given the low volumes over the year-end period and a big seasonal swing. The non-seasonally adjusted rise in ABCP last week was $8.3bn.

“This is a short term respite,” said George Goncalves, chief Treasury strategist at Morgan Stanley. “We still expect the market will ultimately return to its 2005 level of between $650bn and $700bn.”

He added that it was difficult to expect strong growth in the market unless the economy gathered speed.

Since late July, the ABCP market has declined from a peak of $1,200bn as the credit crunch sparked a buyers' strike for short-term paper backed by mortgages and other vulnerable assets.

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