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Commercial Paper Falls for First Time in 3 Weeks, Fed Says

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Nov. 10 (Bloomberg) -- The U.S. market for corporate borrowing with short-term IOUs declined for the first time in three weeks on concern that Europe’s credit crisis was intensifying and may taint U.S. bank balance sheets.

The seasonally adjusted amount of U.S. commercial paper outstanding dropped $12 billion to $967.7 billion in the week ended Nov. 9, the Federal Reserve said today on its website. That followed an $18.7 billion increase in the prior period that was the biggest weekly jump since July, according to Fed data compiled by Bloomberg.

A decrease in short-dated borrowing by U.S. financial issuers led the contraction as traders wagered that the surge in Italy’s bond yields to record highs could affect the region’s banking system and then spread globally. Commercial paper outstanding had the longest declining streak in at least a decade prior to Oct. 26 and has dropped from $1.2 trillion in July, which was the highest since November 2009.

“The domestic financial clearly reflects concern over the exposure of U.S. financial institutions” to Europe’s debt strains, said Howard Simons, strategist with Bianco Research LLC in Chicago. Corporations sell commercial paper to fund everyday activities such as paying rent and salaries.

The amount issued by U.S.-based banks dropped $14.9 billion to $271 billion, partially offsetting the previous period’s $19.7 billion rise, which had snapped six weeks of declines, according to the Fed.

Commercial paper sold by non-U.S. financial institutions fell for a second week, decreasing $3.6 billion to $179.2 billion. Next week’s release could show foreign financial issuance falling more steeply, if the selloff in European sovereign debt intensifies, Simons said.

To contact the reporter on this story: John Parry in New York at jparry5@bloomberg.net

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