Commercial paper is the OG yield farming protocol—$1.1 trillion of unsecured corporate IOUs that mature in 1-270 days. It's like if every corporation could mint their own stablecoin backed by nothing except promises to pay back in 3 months. When this $1.1T market froze in 2008, the entire global economy almost collapsed. No big deal.
The Protocol Design: Corporate Flash Loans That Last 90 Days
Commercial paper (CP) is short-term unsecured debt that corporations issue to fund operations:
The Issuance Stack
// Corporation mints commercial paper
function issueCP(amount, days, discount_rate) {
// Corporation needs $100M for 90 days
face_value = 100_000_000;
discount = face_value * discount_rate * days / 360;
// Investor pays $98.5M today
investor_pays = face_value - discount;
// Corporation repays $100M in 90 days
at_maturity = face_value;
// Effective yield: 6.08% annualized
return (face_value / investor_pays - 1) * 365 / days;
}
No collateral. No covenants. Just "trust me bro, I'm Apple/GE/Toyota."
The Players: Who's Farming These Yields
The Issuers (Borrowers)
| Issuer Type | Outstanding | Typical Rate | Credit Rating |
|---|---|---|---|
| Financial Corps | $500B | CP + 10bps | A1/P1 |
| Non-Financial | $300B | CP + 25bps | A2/P2 |
| Asset-Backed | $250B | CP + 5bps | AAA (lol) |
| Foreign Corps | $50B | CP + 40bps | Various |
The Buyers (Yield Farmers)
- Money Market Funds: $600B (largest buyers)
- Corporate Treasuries: $200B (cash management)
- Banks: $150B (regulatory arbitrage)
- Pension Funds: $100B (short-term parking)
- Your Mom's 401(k): $50B (hidden in MMFs)
The Ratings Scam: Moody's and S&P as the Oracle
Commercial paper only works because of credit ratings—centralized oracles that say "this corporation won't rug":
The Rating Tiers
| Rating | Moody's | S&P | What It Means | Default Rate |
|---|---|---|---|---|
| Tier 1 | P-1 | A-1+/A-1 | "Definitely safe" | 0.01% |
| Tier 2 | P-2 | A-2 | "Probably safe" | 0.10% |
| Tier 3 | P-3 | A-3 | "Maybe safe" | 1.00% |
| Not Rated | - | - | "YOLO" | 10%+ |
Money market funds can ONLY buy Tier 1. This creates a cliff:
- A-1 rated: Borrow at 5.5%
- A-2 rated: Borrow at 7%
- A-3 rated: Can't borrow
- Downgraded: Instant death
It's like if your protocol needed a Chainlink score above 80 or all liquidity instantly disappears.
The 2008 Ratings Failure
Lehman Brothers had P-1/A-1 ratings on September 14, 2008. On September 15, they filed for bankruptcy. The oracles lied.
This caused:
- Reserve Primary Fund: "Broke the buck" (traded below $1)
- $300B in redemptions: In 48 hours
- Complete market freeze: Nobody would buy any CP
- Fed intervention: Created emergency facilities
It's like if USDC depegged because Circle's auditor was lying about reserves.
Asset-Backed Commercial Paper: The Recursive Yield Farm
ABCP is commercial paper backed by... other loans. It's DeFi recursion in TradFi:
The ABCP Structure
- Bank creates SPV (Special Purpose Vehicle)
- SPV buys mortgages/auto loans/credit cards
- SPV issues commercial paper backed by those loans
- Investors buy CP thinking it's safe
- Loans default: CP becomes worthless
It's like:
- Taking volatile collateral (mortgages)
- Wrapping it in a new token (ABCP)
- Calling it "safe" because it's "backed"
- Lehman 2008 speedrun
The Conduits: Shadow Banking at Scale
ABCP conduits are off-balance-sheet vehicles banks use to hide risk:
| Conduit Type | Size | Sponsor | Actual Risk |
|---|---|---|---|
| Multi-seller | $400B | Big banks | Bank's problem |
| Single-seller | $300B | Corporations | Corp's problem |
| SIV | $0 (killed in 2008) | Dead banks | Everyone's problem |
| Repo conduit | $100B | Dealers | Collateral risk |
Banks earn fees for "managing" conduits while pretending they have no risk. When conduits blow up, banks rescue them anyway to protect "reputation." It's like running a leveraged yield farm through a separate wallet and claiming you have no exposure.
The Maturity Wall: Rollover Risk as a Feature
Commercial paper typically matures in:
- 1-7 days: 20% (overnight funding)
- 8-30 days: 40% (monthly rolls)
- 31-90 days: 30% (quarterly)
- 91-270 days: 10% (maximum term)
This means $1.1 trillion needs to be refinanced constantly:
Daily Rollover Requirements
- Average daily: $20-30B matures
- Month-end: $50-75B matures
- Quarter-end: $100-150B matures
- Year-end: $200B+ matures
If the market freezes for even ONE DAY, corporations can't:
- Pay employees
- Buy inventory
- Fund operations
- Service other debt
It's like if every DeFi protocol needed to refinance their entire TVL every 90 days or instantly rug.
The Commercial Paper Funding Facility: The Fed's Bailout Window
When CP markets freeze, the Fed opens the CPFF:
CPFF History
- 2008-2010: Bought $350B in CP (saved everyone)
- 2020-2021: Bought $10B (market less scared)
- Next crisis: Will buy $500B+ (guaranteed)
The Fed literally becomes the buyer of last resort:
- Corporation can't roll CP in private market
- Sells to Fed at penalty rate
- Fed holds to maturity or market recovers
- Taxpayer takes losses if defaults
It's a permanent backstop. Corporations know they can always mint tokens and sell to the Fed if needed. Moral hazard as monetary policy.
The Money Market Fund Connection: Your Savings Account Yield Farms CP
Money market funds are the largest CP buyers, creating systemic risk:
The MMF Portfolio
Average money market fund holds:
- Treasury/Agency: 40% (actually safe)
- Commercial Paper: 30% (corporate risk)
- Repo: 20% (collateralized)
- CDs: 10% (bank risk)
Your "safe" cash sweep is 30% unsecured corporate debt. When you think you're holding dollars, you're actually yield farming corporate credit risk.
The 2.0 Trillion Dollar Breaking Point
If MMFs have mass redemptions:
- Must sell assets to meet redemptions
- CP most liquid so sold first
- Floods market with paper
- Rates spike as prices crash
- Corporations can't roll → default
- MMFs break buck → more redemptions
- Death spiral until Fed intervenes
It happened in 2008. It happened in 2020. It will happen again.
Interest Rate Dynamics: The Spread Game
CP rates float above risk-free rates based on:
The Rate Stack
Treasury Bills: 5.25% (risk-free)
↓ +15 bps
Tier 1 Financial CP: 5.40%
↓ +10 bps
Tier 1 Non-Financial: 5.50%
↓ +25 bps
Tier 2 CP: 5.75%
↓ +50 bps
High Yield CP: 6.25%+
Spreads blow out during stress:
- Normal times: T-Bills + 10-30 bps
- Minor stress: T-Bills + 50-100 bps
- 2008 crisis: T-Bills + 500 bps
- 2020 panic: T-Bills + 300 bps
It's like liquidity pool slippage—normally 0.3%, but 50% during bank runs.
The Issuance Process: Investment Banks as Gatekeepers
You can't just mint commercial paper. You need a dealer:
The Dealer Cartel
- Goldman Sachs: $200B arranged
- JPMorgan: $180B
- Bank of America: $150B
- Citi: $120B
- Everyone else: Fighting for scraps
Dealers charge 5-10 basis points annually. On $1.1T outstanding, that's $550M-$1.1B in fees for being middlemen. It's like Uniswap Labs taking 0.1% of all volume forever.
The Issuance Dance
- Corporation calls dealer: "Need $1B for 90 days"
- Dealer calls clients: "Want Apple paper at 5.45%?"
- Orders collected: Usually 2-3x oversubscribed
- Allocation: Best clients get filled
- Settlement: T+0 (same day, surprisingly)
The dealer sees all flow and can:
- Front-run issuance
- Favor certain clients
- Manipulate rates through allocation
It's the original MEV.
European Commercial Paper: The Offshore Variant
Euro commercial paper (ECP) is CP issued outside the U.S.:
ECP vs USCP
| Feature | U.S. CP | Euro CP |
|---|---|---|
| Size | $1.1T | $500B |
| Currency | USD only | Multi-currency |
| Settlement | Same day | T+2 |
| Regulation | SEC rules | Basically none |
| Investors | Mostly U.S. | Global |
ECP is the wild west—less regulation, worse disclosure, higher yields. It's like using a fork of Compound deployed on BSC. Same idea, more risk, better APY.
The Lehman Moment: When CP Killed the Economy
September 2008 timeline:
- Sept 7: Lehman has $8B in CP outstanding
- Sept 12: Can't roll maturing paper
- Sept 14: Desperately calling for buyers
- Sept 15: Bankruptcy filing
- Sept 16: Reserve Primary Fund breaks buck
- Sept 17: Entire CP market frozen
- Sept 19: Fed creates CPFF
In two days, a $1.2 trillion market died. Corporations couldn't fund payroll. It's like if all of DeFi stopped working because one protocol rugged.
The Regulatory Arbitrage: Why CP Exists
Commercial paper exists to avoid bank loans:
CP vs Bank Loan
| Feature | Commercial Paper | Bank Loan |
|---|---|---|
| Rate | 5.45% | 6.50% |
| Fees | 5 bps dealer | 50 bps arrangement |
| Covenants | None | Many restrictions |
| Disclosure | Minimal | Full financials |
| Speed | Same day | Weeks of negotiation |
| Flexibility | Roll or pay | Locked terms |
Corporations save 100+ basis points by disintermediating banks. It's like using Uniswap instead of Coinbase. Same result, better price, more risk.
Negative Rates: When CP Paid You to Borrow
In Europe 2015-2022, corporations were PAID to issue commercial paper:
Negative Rate Examples
- Nestlé: Issued at -0.20% (paid to borrow)
- Siemens: -0.35%
- Total: -0.15%
Investors paid €100.05 for paper that paid back €100 in 90 days. They lost guaranteed money because:
- ECB deposit rate was -0.50%
- CP at -0.20% beat -0.50%
- Less bad = profitable
It's like negative funding rates but for the entire economy. Complete clown world.
The Future: Tokenized Commercial Paper
Several projects are tokenizing CP on-chain:
Current Attempts
- JPM Coin: JPMorgan's internal CP token
- Obligate: On-chain CP issuance
- Maple Finance: Crypto-native CP equivalent
- Centrifuge: Real-world CP tokenization
The advantages:
- 24/7 trading: Not just NYSE hours
- Instant settlement: T+0 always
- Transparency: On-chain maturity tracking
- Composability: Use as DeFi collateral
- Global access: Not just institutional
The challenges:
- Regulation: SEC says no
- Scale: $1.1T is huge
- Credit assessment: No on-chain credit scores
- Legal recourse: Code isn't law in defaults
Conclusion: The Hidden Leverage in Your MMF
Commercial paper is the shadow banking system hiding in plain sight—$1.1 trillion in corporate IOUs that:
- Fund 30% of corporate America's working capital
- Comprise 30% of "safe" money market funds
- Can freeze overnight and kill the economy
- Get bailed out every crisis by the Fed
- Operate with zero collateral requirements
It's yield farming without smart contracts, liquidations without collateral, and systemic risk without transparency. Your savings account is yield farming corporate credit risk whether you know it or not.
The commercial paper market proves that you can build a trillion-dollar lending protocol on pure trust, as long as you have:
- Rating agencies to lie about risk
- The Fed to bail you out when it breaks
- Money market funds forced to buy your tokens
- Regulations preventing competition
It's not DeFi. It's not transparent. It's not safe. But it's too big to fail, so it keeps running on faith and federal bailouts. The ultimate shitcoin that somehow became critical infrastructure.