March 27 (Bloomberg) -- The market for short-term debt backed by assets including car loans, credit card receivables and mortgages shrank for a fourth consecutive week amid signs that credit quality is weakening.

U.S. asset-backed commercial paper fell $2.6 billion, or 0.33 percent, to a seasonally adjusted $777.7 billion for the week ended March 26, the Federal Reserve in Washington said today.

Buyers are pulling back from the market as U.S. bank earnings are projected to tumble 84 percent in the first quarter, according to Oppenheimer & Co. analyst Meredith Whitney. Citigroup Inc., the biggest U.S. bank by assets, will post a quarterly loss four times as large as she previously estimated, Whitney said yesterday in a revised forecast.

``There is still a lot of fear out there regarding asset- backed CP,'' said Mark Amberson, the director of short-term investments and manager of the $6.2 billion Russell Money Fund at the Russell Investment Group in Tacoma, Washington. ``Everyone is re-thinking their concept of `safe.'''

The broader commercial paper market rose $2.2 billion in the most recent week to $1.83 trillion, according to the Fed data. Companies typically sell commercial paper, which usually matures in three months or less, to help pay day-to-day expenses, including payroll and rent.

Banks' troubles are arriving just as the U.S. economy is showing signs of a recession. Orders for durable goods unexpectedly fell in February, led by a slump in demand for machinery, as the housing downturn makes companies hesitant to invest.

Economy Shrinks

The 1.7 percent drop in demand for products made to last a least three years followed a 4.7 percent decrease in the prior month, the Commerce Department said yesterday. The department also reported that sales of new homes dropped 1.8 percent last month to a 13-year low.

Morgan Stanley economists now predict the economy will shrink at an annual rate of 0.7 percent in the first quarter, from a previous forecast for a 0.4 percent contraction.

Yields on overnight asset-backed commercial paper increased to 3.08 percent this week from 2.59 percent a week earlier, which was the lowest since April 2005, according to data compiled by Bloomberg.

``Money markets have seized up again and by some measures the funding crisis is more acute then ever before,'' Christoph Rieger, a fixed-income strategist in Frankfurt at Dresdner Kleinwort, wrote in a note to clients today.

The extra yield investors demand to own the debt is 20 basis points over the London interbank offered rate, and overnight asset-backed commercial paper has yielded more than the three-month lending benchmark since the week of Dec. 21, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net

Last Updated: March 27, 2008 13:57 EDT