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In contrast, conditions in the commercial paper (CP) market improved over the intermeeting period, likely as a reflection of recent measures taken in support of this market. Spreads on 30-day
A1/P1 and asset-backed commercial paper (ABCP) continued to narrow after the Commercial Paper Funding Facility (CPFF) became operational on October 27, although spreads subsequently reversed a portion of the declines as maturities crossed over year-end. In contrast, spreads on commercial paper not eligible for purchase under the CPFF remained elevated. The dollar amounts of unsecured financial CP and ABCP outstanding rebounded from their October lows, though issuance into the CPFF more than accounted for this increase.
Credit outstanding under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility fell by more than half over the intermeeting period. The Money Market Investor Funding Facility program registered no activity.

As financial market conditions worsened over the intermeeting period, investors seemed to become more concerned about the likelihood of a deep and prolonged recession. In addition, the Treasury Department's announcement that funds from the Troubled Asset Relief Program would not be used to purchase securities backed by mortgage-related and other assets appeared to prompt negative price reactions in several financial markets. Stock prices of financial corporations fell considerably, while broad equity indexes declined, on net, amid high volatility. Yields on investment-grade bonds moved lower, but risk spreads on these instruments over comparable-maturity Treasury securities widened substantially as yields on Treasury securities fell more. Yields and risk spreads on speculative-grade bonds soared, and credit default swap spreads on speculative-grade, as well as investment- grade, corporate bonds widened further. Gross issuance of bonds by nonfinancial investment-grade companies continued at a solid pace, but issuance of speculative-grade bonds remained at zero. Issuance of leveraged syndicated loans was also extremely weak. Strains were evident in a number of other financial markets as well. The functioning of Treasury markets remained impaired, and premiums for the on-the-run ten-year nominal Treasury security rose from levels that were already elevated. The market for commercial mortgage- backed securities experienced a particularly pronounced selloff.

Reflecting investor concerns about the conditions of financial institutions, spreads on credit default swaps for U.S. banks widened sharply, and those for insurance companies remained elevated. To support market stability, the U.S. government on November 23 entered into an agreement with Citigroup to provide a package of capital, guarantees, and liquidity access. In other developments, banking organizations began to take advantage of the Federal Deposit Insurance Corporation's (FDIC) Temporary Liquidity Guarantee Program; eleven institutions issued bonds under the program.

In view of the tightening of credit conditions for consumers and small businesses, the Federal Reserve announced on November 25 the creation of the Term Asset-Backed Securities Loan Facility to support the markets for asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The facility, developed jointly with the Treasury, was expected to be operational by February 2009, and discussions with market participants about operational details of this facility were ongoing.

The Federal Reserve also announced on November 25 that, to help reduce the cost and increase the availability of residential mortgage credit, it would initiate a program to purchase up to $100 billion in direct obligations of housing-related government- sponsored enterprises (GSEs) and up to $500 billion in MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Agency debt spreads, which had widened early in the period, narrowed somewhat after the announcement. Subsequent purchases of agency debt by the Open Market Desk at the Federal Reserve Bank of New York led to a further reduction in agency spreads. Likely reflecting in part these developments, conditions in the primary residential mortgage market improved. The interest rate on 30-year fixed-rate conforming mortgages declined, which prompted a noticeable increase in mortgage refinancing.

M2 expanded at a considerably slower rate in November than October.
Retail money funds contracted after a surge in October that reflected safe-haven inflows to Treasury-only funds. Small time deposits increased somewhat more slowly than in October, although the rate of expansion remained quite rapid as banks continued to bid aggressively for these deposits. Flows into demand deposits covered by the FDIC's new temporary guarantee program were significant and apparently reflected shifts out of savings accounts as well as redirection of funds by banks' customers away from other money market instruments. Currency continued its strong increase, apparently boosted by solid foreign demand for U.S. banknotes.

Liquidity conditions in the money markets of major foreign economies improved but remained strained over the intermeeting period. Movements in stock prices were mixed in the advanced foreign economies, although equity prices generally rose in emerging market economies. In response to evidence of a slowdown in economic activity and a rapid waning of inflationary pressures, central banks around the world eased policy sharply. Sovereign bond yields fell, reflecting prospects for lower inflation and lower policy rates for an extended period. The dollar declined on balance against the currencies of major U.S. trading partners.