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Commercial Paper Expands for First Time in 4 Weeks, Fed Says

The market for corporate borrowing through U.S. commercial paper expanded for the first time in four weeks as investors bought the short-term IOUs of financial institutions even as Europe’s leaders struggle to stop the region’s debt crisis from spreading globally.

The seasonally adjusted amount of commercial paper rose $10.1 billion to $1.008 trillion outstanding in the week ended yesterday, the Federal Reserve said today on its website. It’s the first increase since the period ended May 30 and the highest level since the market reached $1.014 trillion for the week ended June 6, according to Fed data compiled by Bloomberg.

Money-market funds, among the biggest investors in the market, are capping their holdings of European financial commercial paper. While investors are concerned that the region’s fiscal crisis may infect bank balance sheets globally, issuance of U.S. financial institutions’ short-term obligations rose to the highest level in four weeks, even after Moody’s Investors Service downgraded 15 global lenders on June 21.

As the end of June approaches, “financial companies are trading to get their reserve positions in line for quarter-end reporting,” Howard Simons, strategist at Bianco Research LLC in Chicago, said in a telephone interview.

Bank Downgrades

“Even though the banks have been downgraded, you can trust them for the next one to two weeks in the short-term market because they are not going to disappear,” Simons said.

Commercial paper issued by U.S.-based financial institutions jumped the most in seven months, surging $23.7 billion to $297.3 billion outstanding, the highest level since May 30 and the biggest increase since the period ended Nov. 16 when it climbed by $28.6 billion.

The amount sold by non-U.S. financial institutions increased after three weeks of declines, rising $1.2 billion to $193.4 billion outstanding, according to the Fed.

Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as rent and salaries.

To contact the reporters on this story: John Parry in New York at jparry5@bloomberg.net Sridhar Natarajan in New York at snatarajan15@bloomberg.net;

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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