“Faced with an unhappy choice between near-zero rates on short-term Treasury obligations and a desire to limit further exposure to higher-yielding bank instruments subject to sovereign contagion risk, CP investors have continued to look beyond traditional issuers to meet performance objectives,” wrote Fitch analysts led by William Warlick in a research note.
Commercial paper issued by industrial companies has risen since April as the European debt crisis has intensified and U.S. money funds have reduced their holdings of European financial institutions’ paper, Fitch said. U.S. non-financial commercial paper outstanding climbed to $198.7 billion on a seasonally adjusted basis in the latest week, the highest since February 2009, according to Federal Reserve data.
Industrial companies short-term IOUs make up about 20 percent of the U.S. commercial paper market, which mostly comprises bank issues and asset-backed debentures, Fitch noted. As volume from European and U.S. financial institutions has declined, company borrowers have started to fill “an important void”, Fitch wrote.
“It is still a relatively small part of the overall commercial paper market, but the trend is unmistakable and does reflect the desire of money funds to diversify exposure away from banks, especially European banks,” Warlick, who is senior director of Fitch’s credit market commentary group in Chicago, said in a telephone interview.
Issuance by lower-rated Tier 2 borrowers, graded F2 by Fitch, is expected to increase as money-market funds and other investors seek higher returns in short-term credit markets, he said.
U.S. companies’ 30-day Tier 2 commercial paper which Fitch tracks yielded about 38 basis points or 0.38 percentage point on Nov. 18, compared with 33 basis points for Tier 1 paper and Treasury bill rates close to zero.
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