SAN FRANCISCO (MarketWatch) -- The rates on commercial paper issued by highly rated corporations increased Monday, as investors digested a newly launched Federal Reserve program designed to free up working capital essential to many companies' operations.

Overnight commercial paper issued by General Electric Co. GE, -1.29% and ConocoPhillips COP, -3.70% yielded 1% to 1.25%, said Amy Walkington, portfolio manager at Horizon Cash Management, which manages $2.5 billion in commercial paper and other assets. Last week, costs of those ultra short-term borrowings had dipped below 1%, she said.

"Our pricing has been at good spreads, meaning we have funded at or around the average fed funds rate," said GE spokesman Russell Wilkerson. He wouldn't comment on the industrial conglomerate's financing costs.

A ConocoPhillips spokesperson didn't immediately return a call seeking comment.

Restarting credit

The rise in high-quality commercial paper yield coincided with the Fed starting to purchase longer-term commercial paper from banks and corporations as a way of restarting credit flows in this $1.45 trillion market.

Acting as a buyer of last resort, the Fed said it would pay 1.88%, plus a 1 percentage point surcharge, for unsecured commercial paper issued by highly rated companies. It is paying 3.88% for asset-backed commercial paper, according to the Federal Reserve Bank of New York, which is administering the program.

Both rates apply to securities that mature in three months and are part of a facility announced earlier this month that aims to ensure companies can find buyers for their debt.

If the Fed's program works, rates on these securities would eventually fall and issuance should rebound.

However, optimism about its impact may have sent rates down prematurely -- as evidenced by the creep higher in overnight commercial paper rates, maturity that can act as a barometer of investors' sentiment.

"Once it was announced, we saw rates come in, in anticipation, and they might have overshot," Walkington said.

Test of facility

GE, which has about $88 billion in commercial paper outstanding, took part in the Fed's credit facility and sold commercial paper to the central bank, spokesman Wilkerson said in a phone interview, though he declined to disclose the amount.

"The liquidity provided by the facility gives us much more flexibility in redeeming customers' paper and it also helps with maturities," he said.

Investors, reeling from the Lehman Bros. bankruptcy, had shied from buying longer term commercial paper in recent months.

Issuers of asset-backed commercial paper, or another type of this high-quality debt that's backed by credit card receivables or other collateral, may be getting a bargain with the Fed's offer.

The Fed's rate of 3.88% for asset-backed paper was lower than the 4% to 5% range seen in the market in recent weeks, Walkington said.

On Oct. 7 the Fed announced that it would buy 90-day commercial paper after the market showed "considerable strain" in the wake of the collapse of Lehman Brothers, which hit several money-market mutual funds hard. Buyers of commercial paper had become increasingly reluctant to purchase this type of debt. See full story.

A shortage of investors presented an immediate and potentially catastrophic cash crunch for many American companies, which borrow commercial paper to fund daily capital needs, such as payrolls.

"Given the credit crisis, people have not been buying term commercial paper, period," Horizon's Walkington said. "Investors have been staying away from it -- there's been a flight to quality."

GE raised $12.2 billion earlier this month through a stock offering to help shore up its balance sheet, as well as protect itself from the freeze in the short-term commercial-paper markets. See full story.

On Thursday, the Fed's weekly report on changes to its own balance sheet -- the H.4.1 release -- will reveal how much was drawn from the facility for the first three days of this week.

In the week ending Oct. 22, commercial paper outstanding in the United States fell a seasonally adjusted $61.4 billion, or 4%, to $1.449 trillion, for the six straight weekly drop.

Interest rates remained at sharply higher levels during that week, another reflection of stress in the market. The spread between 30-day commercial paper rated A2/P2 issued by nonfinancial firms and AA nonfinancial commercial paper rose to 4.6 percentages points from 4.45 the prior week. Earlier this year, that spread was under 0.7 percentage point.

Elsewhere in credit markets Monday, short-term dollar borrowing costs continued to edge lower though pace remained slow. The London interbank offered rate, or Libor, for three-month dollar loans (a key benchmark) slipped to 3.5075% Monday from 3.51625% on Friday, according to data from the British Bankers Association. The rate has fallen significantly after peaking at 4.81875% on Oct. 10.