The market for corporate borrowing through commercial paper contracted for an eighth week, reaching the lowest level in 21 months, as issuers reduced the amount of short-term IOUs and sold longer-dated corporate bonds, with yields at about record lows.
The seasonally adjusted amount of U.S. commercial paper dropped $19.2 billion to $924.4 billion outstanding in the week ended yesterday, the Federal Reserve said today on its website. That’s the longest stretch of declines in a year and the lowest level since the market touched $916.8 billion in the period ended Jan. 19, 2011, according to Fed data compiled by Bloomberg.
Borrowers are taking advantage of unprecedented low interest rates to sell longer-term company bonds and to reduce the risk of a squeeze in short-term lending amid Europe’s persistent debt crisis.
“The desire to extend maturities is a leading cause of the decline in commercial-paper issuance, rooted in a desire amongst investors to increase the liquidity of their portfolios, while also reducing the possibility that the companies they invest in face rollover risks from an abrupt loss of market access,” Tony Crescenzi, a portfolio manager and strategist at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail.
Money-market funds’ demand for short-term IOUs has declined on concern that Europe’s fiscal strains may damage credit quality globally, making it more difficult for companies to repay these obligations.
The reduction in allocations by prime money market funds to European banks is another cause of the weakness in commercial-paper issuance, Crescenzi wrote.
Commercial paper sold by non-U.S. financial institutions fell $10.6 billion to $216.8 billion outstanding, the lowest level since July 25, while the amount issued by U.S.-based banks rose $1 billion to $245.9 billion outstanding, the first increase in eight weeks, according to the Fed.
“Companies just don’t have the demand for credit” in the commercial-paper market, Anthony Carfang, a Chicago-based partner at Treasury Strategies Inc., a firm that advises corporate treasurers, said in a telephone interview. Many clients are “concerned about the fiscal cliff and therefore they are pulling back,” he said, referring to automatic spending cuts and tax increases that could go into effect starting in January.
Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as rent and salaries.
Companies have sold $3.26 trillion of bonds worldwide this year, a pace that’s second only to the record issuance in 2009, according to data compiled by Bloomberg. Yields on global investment-grade company bonds fell to an all-time low 2.676 percent Oct. 15, according to Bank of America Merrill Lynch index data.