In what is becoming a multi part series on how various products price in recession tonight it is time to check out the commercial paper markets. Below are two charts (1) showing the last two recessions and how commercial paper rates performed and (2) commercial paper rates since Q2 2009. Both charts utilize non financial AA rated 30 and 90 day terms. The results were similar for financial paper as well.

Commercial paper seems to be an excellent market timer of economic recession. Notice the last two periods where rates began falling precipitously and the timing of economic contraction.

It is also interesting to note prior to the 2008 recession rates began moving higher as the economy expanded. Since the 08 recession theoretically ended no such move up in rates has occurred. Whether that is the reality that no real expansion has occurred and or simply an abundance of liquidity in the market is unclear.

To capture changes in commercial paper rates since Q2 2009 a zoomed in chart is presented below. Again notice the fall off in rates albeit from lower levels and the corresponding move lower in GDP.

A similar pattern has developed where rates on 90 day paper have fallen from 34 to 14 basis points and GDP appears to be trending lower. What's "different this time" is the starting point of GDP versus the June 2009 drop off in rates was about 3% higher in real GDP terms.

Should GDP respond to changes in rates as it did in late 2009 then economic contraction is highly probable in 2011.

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.