The risk that investors choose not to reinvest when commercial paper matures is called rollover risk. This particularly happens when market conditions shift. If investors are unwilling to reinvest, the issuer may struggle to refinance the maturing commercial paper. The significance of managing rollover risk became particularly evident in early 2020. Let's take a look at the spread or difference between four week treasury bills and 30 day AA non-financial commercial paper around the onset of the COVID-19 pandemic as shown in the charts. Before the pandemic hits, you can see that the discount rates for both t-bills and commercial paper were closely aligned with a relatively narrow spread or difference between them. Both instruments offered similar short-term yields, reflecting their status as safe short-term investments with minimal risk. Both of them. At this time, AA non-financial commercial paper issuers could rely on steady demand for their short-term debt, and investors viewed commercial paper as a low risk investment. Commercial paper issuers had no problem rolling over their commercial paper.

However, in early 2020, as the COVID-19 pandemic began to unfold, there was a sudden sharp divergence between the two rates. The discount rates on four week T-bills fell dramatically reaching near 0 and even slightly negative at some points while the rate on 30 day AA commercial paper spiked significantly. This reflects the widening spread or difference between the two instruments, and here's why this happened. At the onset of the pandemic market uncertainty soared, investors became highly concerned about the potential economic impacts of COVID-19, including lockdowns supply chain disruptions, and declining corporate revenues. This uncertainty created a massive flight to safety where investors moved their capital into the safest assets available, which are typically US treasury securities like T-Bills. T-bills are considered virtually risk-free because they're backed by the US government. As demand for T-bills surged, their discount rate dropped dramatically as prices rose. At the same time, non-financial commercial paper, even for highly rated financially sound companies started to look much riskier for investors. This is because rollover risk became a significant concern. Investors were worried that these corporations might face difficulties rolling over their maturing commercial paper due to the economic disruptions caused by the pandemic. If corporations couldn't refinance their short term obligations, they could default i.e. not be able to pay their debts making commercial paper or CP a far less attractive option for investors. This increased perceived risk of corporate default led to a sharp rise in the discount rates on commercial paper. As a result, corporations were forced to pay higher rates to attract buyers for their commercial paper during this period of market stress.