The market for corporate borrowing via commercial paper increased to more than $1 trillion outstanding for the first time this year, as investors bought financial institutions’ short-term IOUs even as concern mounts that Europe’s fiscal and currency turmoil may spread.
The seasonally adjusted amount of U.S. commercial paper rose $14.9 billion to $1.009 trillion in the week ended yesterday, the Federal Reserve said today on its website. That’s the highest level since $1.03 trillion on Sept. 21, while the fourth straight weekly increase is the longest streak since the period ended Feb. 8.
As demand from money-market funds, among the biggest investors in the market, has been curbed by concern that Europe’s fiscal crisis will infect bank balance sheets globally, other buyers have entered the market.
“The growth in commercial paper outstanding continues to coexist with a shrinkage in money-market mutual fund assets,” Howard Simons, a strategist at Bianco Research LLC in Chicago, wrote in an e-mail. “This suggests corporate treasurers continue to use very short-term commercial paper as a replacement for institutional money-market funds.”
Commercial paper sold by non-U.S. financial institutions climbed for a third week, increasing $5.6 billion to $189 billion, the highest level since Sept. 28, while the amount issued by U.S.-based banks expanded for a fourth week, rising $2.1 billion to $291 billion, according to the Fed.
Investors are buying short-term obligations from financial institutions because government backing supports many big banks, Simons said. “The banking system is over-reserved and over-protected,” he said.
In an effort to make their holdings safer, investors are shifting into shorter-term maturities within the market for commercial paper, which typically matures in 270 days or less and which corporations sell to fund everyday activities such as rent and salaries.
“The average maturity for CP contracted to the shortest of the year this week, as funding stresses in Europe have reemerged, causing money funds to return a preference for liquidity,” Credit Suisse Group AG analysts led by Ira Jersey wrote in a research report yesterday.