Negative Commercial Paper Spreads and Yield Sampling Mismatches

Summary

The document considers why the observed yield on three-month commercial paper might fall below the yield on a three-month Treasury bill, despite the usual expectation that corporate short-term borrowing carries greater credit risk. The answer offers a data-construction explanation: the two series may be measured or updated at different frequencies. If the commercial paper index remains unchanged for a period while Treasury yields move, a spread calculated from the series can temporarily appear negative.

This is a brief explanation rather than a full account of commercial paper pricing. It does not establish that sampling mismatches caused any particular negative observation, nor does it rule out market mechanics or other differences between the instruments and data series. It provides no empirical comparison, sampling specifications, or economic model. The practical implication is to check how each rate series is constructed and timed before interpreting a calculated spread as evidence that corporate paper is actually trading at a lower risk-adjusted yield than government bills.

Key ideas

• A calculated commercial paper spread can appear negative when the measured rate is below the Treasury bill rate.
• Different update frequencies may cause one yield series to lag changes in the other.
• A temporarily stale commercial paper index can distort a spread calculated from the two series.
• The proposed explanation is not verified for a specific observation and does not exclude other causes.
• Understanding the sampling and construction of each series is necessary before interpreting the spread economically.

Tags

# How can Commercial Paper Spreads be Negative?


# How can Commercial Paper Spreads be Negative?












Looking at the spread between 3 month commercial paper and the 3 month bill (using say, Fred), how/why (economically speaking) can this spread be negative? Are there some mechanics in the commercial paper markets at play that could make this happen? Or are there some idiosyncrasies with how these data-series/rates are sampled/constructed?

In general I would assume short term lending to private companies to be riskier than to the US government (except of course in a few extremely special cases, e.g. J&J and Microsoft).

## Answer by Ryan Olson (score 1)

https://quant.stackexchange.com/a/74309

It could also be due to a mismatch in the frequencies which they measure the yield of commercial paper. So perhaps that cp index number is "pinned" for a bit while treasuries move.

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