by Calculated Risk on 9/18/2008 11:55:00 AM

Here is the A2/P2 spread from the Fed's commercial paper report. The A2/P2 Spread hit 280bp yesterday. This is literally off the chart compared to any previous period.

Click on graph for larger image in new window.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

What is commercial paper (CP)? This is short term paper - less than 9 months, but usually much shorter duration like 30 days - that is issued by companies to finance short term needs. Many companies issue CP, and for most of these companies the risk of default is close to zero (think companies like GE (update: well maybe not GE anymore) or Coke). This is the high quality CP. Here is a good description.

Lower rated companies also issue CP and this is the A2/P2 rating. This doesn't include the Asset Backed CP - that is another category. (see commercial paper table).

Usually the spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. But right now this also shows the lack of liquidity in the system.