The market for U.S. corporate borrowing via commercial paper contracted by the most in 19 months, led by a plunge in the amount of issuance from non-financial companies, amid signs economic growth is slowing.
The seasonally adjusted amount of U.S. commercial paper slid $35.8 billion to $972.5 billion outstanding in the week ended Wednesday, the Federal Reserve said yesterday on its website. It's the biggest drop since a $44.3 billion contraction for the period ended Dec. 1, 2010, and the lowest level since $966.4 billion for the week ended May 9, according to Fed data compiled by Bloomberg.
Industrial firms may have chosen to reduce their reliance on short-term funding for reporting purposes at the close of the second quarter, according to Anthony Carfang, a partner at Treasury Strategies. Investors in the commercial paper market are concerned that Europe's debt crisis may spread, degrading corporate creditworthiness worldwide. The European Central Bank cut interest rates to a record low today and said it won't pay anything on overnight deposits as fiscal upheaval threatens to drive the euro region into recession.
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"A company reaching quarter end may be interested in showing less cash on its balance sheet," said Carfang of Chicago-based Treasury Strategies, a firm that advises corporate treasurers. "They could achieve that by deferring their commercial-paper issuance to after the end of the quarter."
Funding Reliance
The non-financial commercial paper segment also contracted at the close of 2011 and at the end of the first quarter.
"Showing a dependence on short-term funding whether in the repo market or in the commercial-paper market will signal investors you would be vulnerable to a loss of that funding or a higher rate on that funding," Howard Simons, strategist at Bianco Research LLC in Chicago, wrote in an e-mail.
A repurchase, or repo, agreement typically involves the sale of U.S. government securities in exchange for cash, with the debt held as collateral for the loan.
"If a non-financial corporation can fund operations out of its own Treasury for the end-of-quarter reporting and show lower reliance on external funding, it may want to do so," he said.
Commercial paper sold by non-financial companies fell $28.8 billion to $176.8 billion outstanding in the biggest drop since a $44.3 billion contraction in the period ended June 24, 2009. In the week ended Jan. 4, this category dropped $25.8 billion, Fed data compiled by Bloomberg show.
Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as rent and salaries.
Bloomberg News
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