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Abcp The Trillion Dollar Question

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Sep 11 2007 12:00am EDT

ABCP: The Trillion-Dollar Question

Gillian Tett has some numbers on the enormity of the problem in the money markets. The troubled asset backed commercial paper (ABCP) market is about $1.2 trillion in size – three times its 2002 level. The biggest investors in ABCP are money-market funds, which control some $4 trillion in total, and they're essentially refusing to invest in ABCP right now.

I have just one question. Let's say that up until recently, money-market funds had $1 trillion of their assets in ABCP. As that number starts to fall precipitously, what are those funds going to invest in instead? It's not like there's suddenly huge amounts of demand for short-term debt from financial institutions, and I don't see any massive outflows from money-market funds in general. And although there has definitely been a flight to the short end of the Treasury curve, total supply in that market hasn't gone up either. If the money-market funds aren't rolling over their ABCP, what on earth are they buying in its place, when their ABCP holdings mature?

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