Commercial Paper Expands as Treasury Alternatives Sought

The market for corporate borrowing through IOUs expanded to the highest level in eight months as investors turned to alternatives to short-term Treasury bills while a congressional impasse over raising the U.S. debt ceiling threatens to tip the nation into default.

The seasonally adjusted amount of U.S. commercial paper outstanding climbed $11 billion to $1.066 trillion in the week ended yesterday, the Federal Reserve said today on its website. That’s the highest level since the market touched $1.085 trillion for the period ended Feb. 13, according to Fed data compiled by Bloomberg.

One-month Treasury bill rates exceeded those of 30-day commercial paper by the most since at least 2001 as a partial government shutdown stretches into a 10th day one week from the day Treasury Secretary Jacob J. Lew has said his department will run out of borrowing capacity, Bloomberg data show. The inversion in rates signals investors are demanding a higher return to compensate the perceived risk of holding short-dated government debt than for highly rated commercial paper from companies.

Strains, Stresses

“It’s a sign of the strains and stresses, the lack of certainty,” Andrew Milligan, head of global strategy at Edinburgh-based Standard Life Investments Ltd. which has $271 billion of assets under management, said yesterday in an interview in New York. “In effect, the market is saying that for the next two-to-three weeks the credit risk of, for example, a large Dow Jones stock, is considered better than that of the U.S. government.”

Rates on one-month Treasury bills today reached 8.8 basis points more than those of similar-maturity commercial paper after touching the highest level in at least 12 years earlier this week, Bloomberg data show.

Institutional investors in money-market mutual funds that focus almost exclusively on Treasury securities and other debt backed by the U.S. government withdrew $17.5 billion in the past seven days, according to research firm Crane Data LLC in Westborough, Massachusetts. That’s about 2.6 percent of assets in those funds.

During the past week, borrowers have increased the amount of commercial paper issuance via one-to-four day maturities to $48.4 billion from $46.3 billion, while decreasing the amount in the five-to-20 day categories, Federal Reserve data show.

‘Artificially Steep’

“The artificially steep money-market yield curve has encouraged borrowers to shorten their maturities” and refund more frequently, Howard Simons, strategist at Bianco Research LLC in Chicago, wrote in an e-mail.

House Republican leaders proposed a short-term increase in the debt ceiling that would continue the government shutdown and reduce the prospects for a U.S. default while extending the partisan fiscal fight.

The rate on bills maturing on Oct. 17 dropped for the first time in six days, falling 10 basis points, or 0.1 percentage point, at 12:24 p.m. in New York, according to Bloomberg Bond Trader prices.

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; Matt Robinson in New York at mrobinson55@bloomberg.net

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

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