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Commercial Paper Outstanding Drops for Fifth Week

Commercial paper outstanding dropped for a fifth straight week, reaching the lowest on record, as companies take advantage of long-term borrowing costs at about the lowest ever to replace the debt.

The market for seasonally adjusted short-term IOUs fell $44 billion to $1.021 trillion in the week ended Dec. 1, according to data compiled by Bloomberg going back to 2000. Without seasonal adjustment, commercial paper declined $23.8 billion to $1.024 trillion, the biggest drop since March and the lowest since 1998, Bloomberg data show.

Companies have less incentive to issue commercial paper after tapping longer-term bond markets and hoarding cash on their balance sheets, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts. Issuers and investors may also be wary of borrowing for less than 270 days amid concern that European deficits may spark contagion and cut off access to the market.

“Regulations make borrowing less profitable, cash balances make it less necessary,” Crane said in a telephone interview. “There aren’t any visible cracks, but Europe is just a reminder of what happened,” he said, referring to 2008 when credit markets froze and the Federal Reserve had to step in to rescue the financial system.

President’s Working Group

The U.S. Securities and Exchange Commission in January announced rules to impose liquidity restrictions, raise credit standards and give the boards of money-market funds that buy commercial paper more flexibility in the event of a run by investors. Money market funds are, taken together, the largest single buyer of commercial paper in the U.S.

The government is studying additional regulations that include forcing the funds to give up the stable $1 share price that attracted investors to the funds, according to a report published in October by the President’s Working Group on Financial Markets.

The U.S. Treasury Department commissioned the study in June 2009 after the failure of the $62.5 billion Reserve Primary Fund caused a run on the industry. The Fed, which set up a Commercial Paper Funding Facility to restore the flow of credit, yesterday released names of firms that participated, as part of its disclosure requirements established in July’s Dodd-Frank financial-oversight law.

This month, at least 10 companies issued U.S. corporate bonds to repay short-term IOUs, selling $3.36 billion of debt, compared with two issuers selling $5.3 billion in October, Bloomberg data show. Yields on company debt maturing in about 9.3 years rose to 4.92 percent yesterday after declining to 4.44 percent on Nov. 4, the lowest ever, according to Bank of America Merrill Lynch index data.

Greater Regulation

Banks are also facing the prospect of more regulation for short-term funding after the market seized up following the worst financial crisis since the Great Depression, Crane said.

Financial commercial paper outstanding, without seasonal adjustment, dropped $13.9 billion to $510.5 billion, the lowest since 2003, Bloomberg data show. Asset-backed commercial paper fell $4.9 billion, the sixth straight decline, to $379.2 billion, the lowest on record going back to 2001.

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