Sept. 18 (Bloomberg) -- Corporate short-term borrowing slumped the most since December as the bankruptcy of Lehman Brothers Holdings Inc. and takeover of American International Group Inc. drove investors to the safety of government debt.

The U.S. commercial paper market fell $52.1 billion, or 2.9 percent, to a seasonally adjusted $1.76 trillion for the week ended Sept. 17, the Federal Reserve said today in Washington. On a non-seasonally adjusted basis, the market dropped $74.1 billion, or 4.2 percent, to $1.68 trillion, the biggest percentage-point decline in at least 26 years.

Short-term debt costs for General Electric Capital Corp., UBS AG and Sears Holdings Corp. rose to the highest since at least March because of a credit seizure sparked by Lehman's bankruptcy filing on Sept. 15 and the near-collapse of AIG. Investors are pouring their cash into Treasuries, sending three- month bill yields yesterday to the lowest in at least 54 years.

``There's a loss of confidence in the market,'' said Ina Steinke, a Hanover-based money-market trader for Norddeutsche Landesbank Girozentrale AG, Germany's fourth-biggest state-owned bank. ``You don't know if one of the banks you're trading with is next.''

The Reserve Primary Fund and the Reserve International Liquidity Fund Ltd. became the first money-market funds to ``break the buck'' since 1994, with their net asset values falling below the $1-a-share paid by investors. The Reserve Primary Fund, the oldest in the U.S., lost more than 60 percent of its assets to redemptions this week.

Putnam Investments

Putnam Investments LLC closed its $12.3 billion institutional Putnam Prime Money Market Fund yesterday and said it plans to return all cash to investors. The fund, which was valued yesterday at $1 a share, experienced ``significant redemption pressure,'' the Boston-based company said today in a statement.

Money-market funds are among the biggest buyers of commercial paper. Investors pulled $80.7 billion from taxable money-market funds in the week ended Sept. 16. Total assets in U.S. money-market mutual funds fell 2.5 percent to $3.45 trillion, according to Money Fund Report, a Westborough, Massachusetts-based newsletter.

Companies sell commercial paper, which usually matures in three months or less, to help pay for day-to-day expenses, including payroll and rent.

Long-term financing has also dried up as the U.S. corporate bond market ground to a halt this week. Qwest Communications International Inc., the third-largest local phone company, said yesterday it may pay off debt instead of refinancing because of ``shaky'' credit markets.

Overnight Commercial Paper

Overnight commercial paper has jumped 1.38 percentage point this week to 3.46 percent, Bloomberg data show. Yields on 30-day commercial paper rose 73 basis points to 3.1 percent. A basis point is 0.01 percentage point.

Yields on three-month Treasury bills rose 3 basis points today to 0.07 percent after falling to the lowest since at least 1954 yesterday. The rate was 1.47 percent on Sept. 12.

GE Capital, the financing arm of the world's third-largest company, is willing to pay 2.5 percent to issue 30-day commercial paper, the most since March 14.

UBS, Switzerland's biggest bank, is offering a rate of 3.3 percent on 30-day paper, the most all year and up 0.88 percentage point this week, Bloomberg data show. Hoffman Estates, Illinois- based Sears today posted a rate of 3.69 percent, the most since March and 0.6 percentage point more than last week, to issue 30- day commercial paper.

Market Contraction

U.S. commercial paper slumped the most since the week ended Dec. 19, when the market fell 2.98 percent. After matching a peak of $2.22 trillion on Aug. 8, 2007, the market contracted as rising defaults on subprime mortgages caused asset-backed commercial paper outstanding to fall for 20 straight weeks.

``The drop reflects the seizing up of the credit market that has occurred this week and withdrawals of monies from money market funds,'' Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York, said today in a note to clients. ``A continuation of this trend would be problematic for the economy, as the commercial paper market is where entities go to raise working capital to produce goods and services.''

The U.S. market for short-term debt backed by assets including mortgages and car loans fell $18.6 billion this week to a seasonally adjusted $761.6 billion, according to the Fed. Financial commercial paper outstanding fell $16.9 billion to $798.6 billion.

On a non-seasonally adjusted basis, asset-backed commercial paper fell $32.6 billion to $708.3 billion, the lowest since February 2005, and financial paper dropped $43 billion, or 5.3 percent, to $765.1 billion.

Central Banks

The Fed today coordinated with other central banks to try to ease the credit crisis by almost quadrupling the amount of dollars its counterparts can auction around the world to $247 billion.

``It always helps when central banks provide liquidity to the market, but it's not that easy to heal the lack of confidence,'' Steinke said.

The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated.

Policy makers have struggled to revive confidence in markets this week as investors stockpiled money on concern more financial institutions would collapse after Lehman and AIG failed.

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

Last Updated: September 18, 2008 15:35 EDT