Sept. 29 (Bloomberg) -- The same credit crunch gripping banks, brokers and insurers is providing industrial companies with the lowest short-term borrowing costs in almost four years.

Yields on commercial paper due in 30 days sold by manufacturers and retailers fell to an average 2.14 percent last week, while those for financial borrowers rose to 3.15 percent. The spread between the two widened as much as 1.45 percentage points, the most since the Federal Reserve began compiling the data in 1997. Banks historically issued short-term IOUs at yields about 0.02 percentage point less than industrials, Fed data show.

Money-market funds that gorged on the debt of financial companies are now pouring cash into Treasury bills and corporations which avoided the troubled mortgage bonds that contributed to the failures of New York-based Lehman Brothers Holdings Inc. and Washington Mutual Inc. of Seattle. Yields on 30-day non-financial commercial paper dropped to 1.86 percent on Sept. 24, the lowest since November 2004.

``Investors afraid of owning financials are buying industrials as a haven,'' said Ira Jersey, an interest-rate strategist at Credit Suisse Holdings USA Inc. in New York.

Lower short-term rates are proving irresistible to companies that haven't relied on borrowing, or leverage, to pump up profits.

`Good Demand'

Microsoft Corp., the world's biggest software maker, last week added a $2 billion commercial paper program and said it may sell as much as $6 billion in debt. Standard & Poor's assigned Redmond, Washington-based Microsoft a AAA rating, making it the first company to get the highest possible grade in a decade.

``I would think there would be good demand'' for the debt because Microsoft isn't a financial company, said Jill King, a senior manager at Horizon Cash Management in Chicago, who oversees $2.5 billion in fixed-income assets.

Companies sell commercial paper, which matures in nine months or less, to help pay for day-to-day expenses such as payroll and rent. The market slumped $61 billion, or 3.5 percent, to a seasonally adjusted $1.7 trillion in the week ended Sept. 24, Fed data show. The peak came in July 2007, just before the subprime mortgage market collapsed, when $2.22 trillion of the debt was outstanding.

The U.S. House of Representatives today rejected a $700 billion financial-rescue plan intended to restore confidence in the nation's banking system, dealing a blow to government efforts to contain a lending crisis. The Standard & Poor's 500 Index retreated as much as 7.6 percent. The index fell 91.78 points to 1,121.23 as of 3:24 p.m. in New York.

Failures Accelerate

Yields on all top-rated issuers rose 43 basis points to 3.72 percent, the highest since Jan. 22, as governments globally propped up banks including Bradford & Bingley Plc, the U.K.'s biggest lender to landlords.

The greatest demand is for debt with the shortest maturities. Commercial paper maturing in four days or less ballooned to an average of $164 billion a day in the week ended Sept. 26, from $87 billion at the start of the month. Daily sales of debt due in 21 to 40 days fell 35 percent to $10 billion.

Even though top-rated issuers of commercial paper are getting lower rates, investors are demanding second-tier, or lower-graded borrowers, pay 4.9 percent for overnight debt and 5.5 percent for 30-day loans, according to Fed data.

Companies with investment-grade credit ratings sold $24.3 billion of bonds this month, compared with $110.9 billion for the same period last year, according to data compiled by Bloomberg.

Run on Funds

Money funds have been dumping debt sold by financial companies as the pace of failures accelerated in the past month. The government seized Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, the two biggest mortgage finance companies, and took control of New York-based American International Group Inc., the largest U.S. insurer.

Lehman went bankrupt and Washington Mutual was seized by regulators in the biggest bank failure in U.S. history.

Reserve Primary Fund, the oldest U.S. money fund, became the first in 14 years to see its net asset value fall below $1 a share because of holdings of Lehman debt.

A run on money funds began after Reserve Primary fell to $0.97 a share. Investors pulled a record $120.5 billion from the funds in the week ended Sept. 23, according to the Money Fund Report, a newsletter based in Westborough, Massachusetts.

Money funds reacted by selling financial company debt and putting the money in the shortest-term government and industrial company securities. Three-month Treasury bill rates fell to 0.02 percent on Sept. 17, the lowest since Franklin. D. Roosevelt was president.

``Even with withdrawals there is more than $3 trillion in money market mutual funds that has to find a home,'' Credit Suisse's Jersey said.

General Electric

General Electric Co., the world's biggest provider of aircraft leasing, jet engines, power-plant turbines, medical imaging machines and locomotives, is having no problems accessing the short-term debt market even though about half of its business comes from lending, Chief Financial Officer Keith Sherin said on a conference call with investors Sept. 25.

``Even in the last 10 days where you've had some significant disruptive days, we continue to see a flight to quality,'' Sherin said.

Fairfield, Connecticut-based GE is obtaining funding 25 basis points, or 0.25 percentage point, below interbank lending rates and the average maturity of its commercial paper is 61 days, he said. That works out to be 2.31 percent based on the 2.56 percent overnight London interbank offered rate on Sept. 25. The average 60-day rate for top-rated financial companies is 2.82 percent, according to Fed data.

Still, the company's General Electric Capital Corp. financing unit plans to reduce commercial paper outstanding to between 10 percent and 15 percent of total debt, or about $10 billion, according to Sherin.

To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net

Last Updated: September 29, 2008 15:29 EDT