After a long slide, the commercial paper (CP) market appeared to perk up this summer. The amount of CP outstanding, which peaked at $2.2 trillion in 2007, hit a low of $1.042 trillion dollars this June, then rose some $70 billion over the next six weeks, to $1.1 trillion. Optimists began to speculate that the downward trend was over. But the Federal Reserve's data for the week ended Aug. 25 showed the CP market had slipped about $25 billion, to $1.087 trillion. Is the CP market signaling that the economy is dipping back into a recession?

Actually, it's a case of two steps forward, one step back, says Robert Little, head of global short-term fixed-income origination at Bank of America Merrill Lynch. Despite the fluctuations, "the market has stabilized," he says. "We're not seeing [significant] contraction."

Little cites several reasons for a positive view of the CP market. "First, as the outlook for the economy improves you'll start to see a pickup in M&A and more companies using CP as a bridge financing tool for acquisitions," he says. "Secondly, companies will build more inventory and as a result there will be a need to issue more short-term debt" to finance that inventory.

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