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Commercial Paper Market Shrinks the Most in Seven Years

Commercial Paper Market Shrinks the Most in Seven Years

By BLOOMBERG NEWS
Published: August 24, 2007

The size of the commercial paper market, a crucial source of short-term financing for businesses, decreased 4.2 percent last week, the biggest drop in at least seven years, as investors fled asset-backed debt and opted for the safety of Treasuries.

Short-term debt maturing in 270 days or less fell $90.2 billion to a seasonally adjusted $2.04 trillion in the week that ended yesterday, according to the Federal Reserve. Commercial paper outstanding has fallen by $181.3 billion, or more than 8 percent, in two weeks.

The retreat may indicate that the Fed’s decision to lower the discount rate last week failed to instill enough calm to draw back investors. Commercial paper backed by assets led the fall as buyers fled debt linked to subprime mortgages. Outstanding paper may slump by a total of $300 billion, representing the entire amount of the debt backed by home loans, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Company.

“The commercial paper market, in terms of the asset-backed commercial paper market, is basically history,” said William H. Gross, chief investment officer of the bond management firm Pacific Investment Management Company, known as Pimco.

Also yesterday, the Federal Reserve said banks borrowed a daily average of $1.2 billion in the past week, swollen by the four biggest lenders who sought to display support for the Fed’s discount-rate cut.

The decline in outstanding commercial paper was driven by a 6.8 percent fall in asset-backed commercial paper, which represents about half the commercial paper market and has been used to finance purchases of subprime mortgages.

Banks worldwide have $891 billion at risk because of credit agreements on asset-backed commercial paper programs, Fitch Ratings said.

The most recent decline is the biggest by percentage since at least November 2000, according to data compiled by Bloomberg.

The Fed lowered the interest rate it charges to lend to banks to encourage buyers of commercial paper after the market seized up last week for Countrywide Financial Corporation and other mortgage lenders. Countrywide borrowed its entire $11.5 billion in available bank credit lines in order to fund its operations, although the Bank of America Corporation has agreed to provide $2 billion of new capital through the purchase of preferred securities.

“The shrinkage of the commercial paper market will force companies to obtain money elsewhere,” Mr. Crescenzi, who is based in New York, said in e-mailed comments. “Some will be unable to obtain funding and will shut or scale back their operations.”

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