Oct. 30 (Bloomberg) -- Corporate borrowing in the U.S. commercial paper market soared the most on record after the Federal Reserve began buying the debt directly from issuers as part of its effort to lure back money-market investors.

U.S. commercial paper outstanding rose by $100.5 billion, or 6.9 percent, to a seasonally adjusted $1.55 trillion for the week ended Oct. 29, the Fed said today in Washington. It was the first gain in seven weeks, reversing a 20 percent decline during the previous six weeks.

``Confidence is coming back,'' said Peter Crane, president of Crane Data LLC, a money-market research firm based in Westborough, Massachusetts. ``Knowing the Fed will buy the longer term means companies will be able to refinance and take back their short-term paper if need be.''

American Express Co., the biggest U.S. credit-card company, and General Electric Co. are among the companies that sold commercial paper to the Fed since the central bank began the program on Oct. 27 to unlock the short-term debt market. Commercial paper issuance seized up after Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, sending investors to the safety of government debt.

Sales of commercial paper due in more than 80 days totaled more than $171 billion in the program's first three days, compared with $33.5 billion all of last week and $115.9 billion in the previous six weeks combined, Fed data show. Issuance reached a record $67.1 billion on its first day, compared with a daily average of $6.7 billion last week, according to Fed data.

Financial paper led this week's gain, rising $69.4 billion, or 12.4 percent, to $628.8 billion.

Bank Issuers

Financial issuers that had been mostly shut out of the market for anything but overnight commercial paper were among the biggest sellers of longer-term paper this week. Top-rated financial companies sold $39.8 billion of debt due in more than 80 days in the last three days, including $28.2 billion yesterday, compared with a daily average of about $134 million since the Lehman bankruptcy filing on Sept. 15.

``This is good news for issuers, as it will relieve strains associated with having to issue more frequently,'' Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. LLC in New York, said in a note to clients. ``Issuers are now `locked in' to funding and can go about the normal functioning of their businesses without having the burden of corporate finance hanging over their heads.''

GMAC, Chrysler

Units of GMAC LLC, Chrysler LLC and Ford Motor Co., and New York-based Morgan Stanley have also registered to issue paper to the Fed, which announced the program on Oct. 7. Other measures the Fed has launched to relieve pressure on money-market funds include encouraging banks to take on asset-backed commercial paper and committing to provide $540 billion in loans to buy short-term debt.

``The introduction of the commercial paper program is an enormous jolt of not just liquidity but stimulus to the economy,'' Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey, said in a Bloomberg Television interview. Clearbrook manages about $20 billion.

The interest rate the Fed charges to buy commercial paper fell today after the central bank slashed its target lending rate by half a percentage point to 1 percent, matching a half-century low last reached in June 2004.

Libor Falls

Money-market rates fell after the Fed cut rates and agreed to pump $120 billion into Brazil, Mexico, South Korea and Singapore to help alleviate demand for dollar-based funding. The London interbank offered rate, or Libor, for three-month loans in dollars slid 23 basis points to 3.19 percent today, its 14th consecutive drop, according to the British Bankers' Association.

The swap agreements with central banks, which also followed rate cuts from China to Norway, led to a drop in three-month rates in Asia.

The Fed set the rate it's willing to accept for 90-day unsecured commercial paper at 2.74 percent, including a credit surcharge, down 0.1 percentage point. The rate on paper backed by assets such as auto loans and credit cards fell the same amount to 3.74 percent. The rates are set under the Fed's Commercial Paper Funding Facility once a day and are available on CPFF.

``The CP market continued to benefit from the Commercial Paper Funding Facility that went into effect this week,'' Bank of America Corp. analysts led by Hans Mikkelsen in New York said yesterday in a report.

The Fed will release details of borrowing under its new facility today at 4:30 p.m. in New York.

Lehman Collapse

Money-market investors began fleeing the commercial paper market after the Lehman bankruptcy, forcing many companies to roll the debt daily or leave the market and prompting others to lock in alternative financing. Verizon Communications Inc., the second-largest U.S. phone company, and Estee Lauder Cos. both began offering corporate bonds today to repay commercial paper.

Computer Sciences Corp. cited market ``instability'' when it said on Oct. 23 that it tapped a $1.5 billion revolving credit facility, the maximum amount, to repay short-term paper. Nestle SA said it used $10.4 billion in proceeds from selling a stake in one of its units to reduce the company's exposure to the market.

Quoted rates on 90-day commercial paper, which matures in 270 days or less, fell 0.03 percentage point today to a six-week low of 3.09 percent, according to yields offered by companies and compiled by Bloomberg. Rates on the highest-ranked commercial paper due in 30 days rose 0.27 percentage point to 2.41 percent.

Overnight rates fell 0.15 percentage point to 0.35 percent, the lowest on record.

The Fed's 90-day unsecured commercial paper rate is 1.74 percent and is comprised of the overnight indexed swap rate plus 1 percentage point. Companies that don't post collateral must pay an additional 1 percentage point.

The overnight indexed swap rate, or OIS, fell 0.11 basis point today to 0.67 percent, the lowest in at least seven years, which would put the CPFF rate at about 2.67 percent.

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

Last Updated: October 30, 2008 13:42 EDT