The market for corporate borrowing through U.S. commercial paper declined to the lowest level in more than a year as investors shunned short-term IOUs from financial institutions on investor concern that Europe’s fiscal strains will taint bank balance sheets globally.
The seasonally adjusted amount of commercial paper outstanding fell $10.4 billion to $927.2 billion in the week ended yesterday, the third consecutive decrease, the Federal Reserve said today on its website. That’s the longest stretch of declines since the period ended Jan. 4 and the lowest level since the market touched $916.8 billion on Jan. 19, 2011, according to Fed data compiled by Bloomberg.
Demand from U.S. money-market funds, among the biggest investors in short-term financial obligations, has been capped by concern that European debt stresses may push the price of these securities lower, even after unprecedented financial aid measures for the area’s banks. The European Central Bank lent a total of 529.5 billion euros ($712.2 billion) in three-year funds to banks yesterday, more than the 470 billion euros median forecast in a Bloomberg News survey.
While the ECB has helped ease strains in interbank lending markets, demand among investors for commercial paper is declining, Howard Simons, strategist at Bianco Research LLC in Chicago, said in a telephone interview. “There is no logic anymore in holding a money market fund for most investors because we have raised the specter once again,” of the risk of the assets they contain, Simons said.
Another trend curbing issuance of short-term company IOUs is that many borrowers are selling corporate bonds instead.
“You may as well lock in those funding needs in the corporate bond market rather than risk those shorter-term rates flying higher on you,” Simons said.
A fall in borrowing by financial firms led the market’s contraction. Commercial paper sold by non-U.S. financial institutions fell for a third week, sliding $2.4 billion to $153.3 billion outstanding, while the amount issued by U.S.- based banks declined for a fifth week, dropping $3 billion to $270.3 billion outstanding, according to the Fed.
Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as paying rent and salaries.