Nov. 10 (Bloomberg) -- Interest rates on U.S. commercial paper fell to the lowest in at least 12 years as companies reduced sales of the debt to the Federal Reserve, which so far has absorbed more than one-fifth of the market.

Rates on the highest-ranked 30-day commercial paper dropped 0.16 percentage point to 0.88 percent, or 0.12 percentage point less than the Fed's target lending rate, according to yields offered by companies and compiled by Bloomberg.

Yields plunged after the central bank began buying 90-day commercial paper from companies on Oct. 27. Falling rates and the highest sales of 60-day commercial paper in 11 weeks signal money-market funds are again holding debt they fled after the September bankruptcy of Lehman Brothers Holdings Inc. raised concern that even the biggest financial companies may fail.

Companies issued $34.8 billion of commercial paper due in 41 days to 80 days last week, the most since the week ended Aug. 22 and double the amount sold the previous week, according to Fed data. Issuance of paper due in more than 80 days plunged to $67.3 billion from $263.3 billion during the first week of the Fed's Commercial Paper Funding Facility, indicating companies are relying less on the program. Financial companies rated AA sold no commercial paper to the Fed last week, central bank data show.

The Fed's commercial paper holdings increased by $98.9 billion in the week ended Nov. 5, down from $145.7 billion in the program's first three days, according to the central bank. The Fed's holdings now total $244.6 billion.

Loans to Banks

The Fed also holds $85.1 billion in loans to banks for purchases of asset-backed commercial paper from money-market mutual funds, bringing the total commercial paper risk on its balance sheet to $329.7 billion of the $1.6 billion market.

Average yields soared to 4.28 percent on Oct. 9, or a record 2.78 percentage points more than the target rate. The yields are at their lowest since Bloomberg began compiling the records in January 1996.

The Fed today set the rate it's willing to accept for 90-day commercial paper at 2.53 percent, down 0.01 percentage point, including a 1 percentage-point unsecured credit surcharge. The 90-day secured asset-backed rate was set at 3.53 percent, according to Fed data compiled by Bloomberg.

The rates are determined under the Fed's CP facility and are available on CPFF. Commercial paper, which matures in 270 days or less, is used by companies to finance daily expenses such as payroll and rent.

Genworth Financial Inc., the insurer spun off by General Electric Co., was ousted from the program because its credit ratings were cut, according to a regulatory filing today.

The following companies are among those that have registered with the CPFF: American Express Co.; American International Group Inc.; Chrysler Financial Corp.; Ford Motor Credit Corp.; GMAC LLC; General Electric Co.; General Electric Capital Corp.; Harley-Davidson Inc.; Kookmin Bank; Korea Development Bank; Morgan Stanley; Prudential Financial Inc. and Torchmark Corp.

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: November 10, 2008 16:42 EST