Sept. 27 (Bloomberg) -- The decline in the U.S. commercial paper market slowed last week, after the Federal Reserve cut interest rates to shore up confidence in the credit markets.

Debt maturing in 270 days or less fell by $13.6 billion in the period ended yesterday to a seasonally adjusted $1.86 trillion, including a $17.3 billion decline in asset-backed commercial paper, according to the Federal Reserve in Washington.

The amount outstanding has fallen by $368.1 billion, or 17 percent, over seven straight weeks to the lowest since August 2006 as some issuers were shut out of the market. The decline is smaller than the previous week's drop of $48.1 billion, a sign that the credit crunch in short-term debt markets may be subsiding following the Fed's half-percentage-point reduction in its benchmark rate on Sept. 18.

``The commercial paper market is not deteriorating as fast as it was in August, but as long as outstandings continue to fall, it is not out of the woods yet,'' Christopher Low, chief economist at FTN Financial in New York, wrote in a note to clients. ``It's still more accurate to say the patient is less sick than to say the patient is recovering.''

Asset-backed commercial paper has fallen $270.5 billion, or 23 percent since Aug. 8 to $912 billion after seasonal adjustments, according to the Fed.

Commercial paper is bought by money market funds and mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables, as well as car loans. Some of the programs are backed by subprime loans, issued to borrowers with poor credit or high debt.

Withdrawals Froze

Yields of asset-backed commercial paper soared to six-year highs for overnight borrowing on Aug. 9 after BNP Paribas SA froze withdrawals from three investment funds that held subprime bonds. Three U.S. commercial paper issuers, units of American Home Mortgage Investment Corp., Luminent Mortgage Capital Inc., and Aladdin Capital Management LLC, exercised an option to delay repaying the debt, casting a pall over a market that's been considered almost risk free.

Because some of the programs are backed by subprime loans, where defaults had reached a five-year high, investors refused to buy the debt.

Yields Dropped

Yields on overnight commercial paper dropped 16 basis points to 5.12 percent today, a sign of demand. The yields have dropped from 6.18 percent on Aug. 31.

The amount of commercial paper for all categories is now at its lowest since the week ended Aug. 30, 2006. Asset-backed commercial paper, at $912 billion, is at its lowest since May 31, 2006.

The Fed lowered its federal funds rate to 4.75 percent earlier this month as companies lost access to the credit markets.

The ``tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally,'' the Fed said in its statement.

``Stability is what should be expected,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. ``The weaker economy could cause it to slip, but I feel that most of the purging of issuers deemed risky has already occurred.''

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

Last Updated: September 27, 2007 17:56 EDT