Tier 1 issuers accept a deeper discount to access the Fedfacility; as of last week, the funding facility was accepting paperat a discount rate of 1.21%, while Tier 1 nonfinancial paper in theregular market was going at a discount of 21 bps and Tier 1financial paper at 51 bps. But the funding facility's pricing looksattractive to Tier 2 issuers; AFP calculates that Tier 2 companiesare paying 2.12% more to issue 90-day paper than Tier 1companies.

If Tier 2 companies, such as FedEx, Kraft and Safeway, canaccess the commercial paper market, that takes some pressure offbanks, says Kalish. “Every dollar they can't fund themselves in thecommercial paper market, they're turning around and funding withtheir banks,” he says. “That's one more dollar banks don't have tolend elsewhere.”

Still, the commercial paper market is showing some signs oflife. Outstandings totaled $1.48 trillion in March, still well offthe market's 2007 peak of $2.2 trillion. But the CPFF's holdingsare off almost a third from the peak of $349.9 billion in lateJanuary, suggesting more issuers are able to stand on their own. Inthe final week of March, the facility held $240.8 billion, or about16% of the total paper outstanding.

Diane Vazza, head of global fixed-income research at Standard& Poor's, notes that it's normal for issuance of commercialpaper to decline when the economy dips. “During a recession,companies that finance their short-term needs, like inventory, withcommercial paper are carrying less,” she says. “They don't have thesame business needs to draw down so much on their commercialpaper.”

Vazza says the fall-off in commercial paper also reflectsinvestment-grade companies' moves in recent months to refinanceshort-term borrowings by issuing longer-term bonds as bond marketconditions improve. Credit spreads have been narrowing, she notes,with S&P's investment-grade index now at 446 bps overtreasuries, down from 531 at the beginning of the year. “It hasbeen very attractive for companies to come to the bond market andso a number of investment-grade companies termed out theirshort-term debt into the bond market and were able to do that atattractive rates and extend maturities,” she says, noting that sucha move allows companies to eliminate rollover risk. Financialcompanies have been able to access the bond market at particularlyattractive rates thanks to a Federal Deposit Insurance Corp.guarantee program, Kalish adds.

It's not clear how the market would be faring without thesupport from the Fed, says Kalish. The funding facility's holdingshave hovered between $240 billion and $250 billion for the lastcouple of months. “It looks as if there's a constant $250 billionout there that people are just comfortable having with thegovernment, even though there's a bit of a premium to have itthere,” Kalish says. “The question we can't really answer is whathappens if we get to Oct. 30 and [the funding facility] is notextended. Are people going to be comfortable buying commercialpaper without the government stepping in?”