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Commercial debt increases

The market for asset-backed commercial paper managed its first increase since early August in the latest week, confirming that a set of coordinated central bank initiatives managed to keep the market liquid at the year-end.

Analysts said US Federal Reserve data in future weeks would make clear whether the growth the asset-backed market saw at the year-end was a fluke linked to the extraordinary central bank efforts, or the start of a positive trend.

"The pop in this first week of 2008 will probably prove an aberration in the ongoing unwind of the commercial paper funding vehicles for securitized mortgages," Action Economics said.

Data posted by the Fed showed a US$26.3 billion increase in asset-backed commercial paper in the week to Wednesday. The rise marked the first increase since the week of Aug. 8, when the market began contracting amid fears over exposure to subprime mortgage assets.

The increase in asset-backed sales was partially offset by declines in other areas, including a US$9,6 billion drop in commercial paper issued by financial institutions. As a result, the overall market for all commercial paper rose by US$13.2 billion in the latest week.

Commercial paper is a type of short-term note issued by corporations to fund short-term operations. Normally it is a highly liquid market, but it has been under pressure since last summer because some asset-backed commercial paper uses subprime mortgages as collateral.

The Fed, in concert with the European Central Bank, the Bank of England and the central banks of Canada and Switzerland, last month put in place a number of extraordinary measures to make sure that the financial markets had sufficient funding.
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