Commercial Paper Sees Fourth Consecutive Decline

Market at lowest level since July as financial borrowers retreat.

The market for corporate borrowing via commercial paper contracted to the lowest level in more than two months as U.S. financial institutions turned more to central banks for funding.

The seasonally adjusted amount of U.S. commercial paper dropped $18.1 billion to $990.1 billion outstanding in the week ended yesterday, the fourth straight decrease, the Federal Reserve said today on its website. It’s the longest stretch of declines since the period ended March 7 and the least since the market touched $982.5 billion in the period ended July 18, according to Fed data compiled by Bloomberg.

Financial borrowers have relied increasingly on central banks for funding as demand has declined for short-term obligations on concern that Europe’s sovereign-debt turmoil may contaminate balance sheets globally. The Fed said on Sept. 13 it will expand its holdings of long-term securities with purchases of $40 billion of mortgage debt a month in an additional round of so-called quantitative easing.

“The U.S. financial system simply remains over-reserved; the anticipation and arrival of QE3 exacerbates this condition and mitigates the need to issue domestic financial CP,” Howard Simons, strategist at Bianco Research LLC in Chicago, wrote in an e-mail.

Commercial paper issued by U.S.-based banks fell $10.8 billion to $275.7 billion outstanding, the fourth straight decline and the lowest level since $273.7 billion in the period ended June 20, according to the Fed. The amount sold by non-U.S. financial institutions rose for the first time in three weeks, increasing $3 billion to $232 billion.

“Lately there has been evidence of a weakening in industrial output both in the United States and abroad,” which “is likely dampening the need for working capital, resulting in a reduction in commercial-paper issuance,” Tony Crescenzi, a portfolio manager and strategist at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail.

Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as rent and salaries.


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