Commercial Paper Market Contracts Most in Two Years

Outstanding commercial paper plunged $42.5 billion in latest week.

The market for corporate borrowing through commercial paper contracted by the most in more than two years as U.S. money-market funds reduce purchases of the short-term IOUs.

The seasonally adjusted amount of U.S. commercial paper plunged $42.5 billion to $1.02 trillion outstanding in the week ended yesterday, the sixth decrease in seven weeks, the Federal Reserve said today on its website. The decline was the biggest since the week ended Dec. 1, 2010 when the market fell $44.3 billion, and the lowest level outstanding since Nov. 21.

Demand from money-market funds, among the biggest buyers of commercial paper, has declined this year, while companies have been able to issue longer-term debt in the corporate-bond market at about record-low borrowing costs. Total assets in the funds have decreased to $2.663 trillion in the week ended Feb. 27 from $2.716 trillion for the period ended Jan. 9, according to the Investment Company Institute.

“The largest factor has been a decline in money-market funds,” Howard Simons, strategist at Bianco Research LLC in Chicago, wrote in an e-mail. “Second, the continued compression in credit spreads has encouraged borrowers to lock in funding in the bond market.”

Commercial paper sold by non-U.S. financial institutions dropped $13.7 billion to $205.2 billion outstanding, the lowest level since the week ended Nov. 21, while the amount issued by U.S.-based banks fell $9.4 billion to $308 billion, the least since the period ended Dec. 19, according to the Fed.

“U.S. commercial banks have substantially reduced their reliance on short-term financing,” Barclays Plc analysts led by Joseph Abate wrote in a report today. “They have replaced CP and large time deposits with proportionally more retail deposit funding, which is seen as more stable and less flight-prone.”

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


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