The market for corporate borrowing through commercial paper contracted for a fifth week as financial institutions reduced issuance of short-term IOUs, instead borrowing cheaply from central banks and issuing corporate bonds at record-low interest rates.
The seasonally adjusted amount of U.S. commercial paper dropped $15 billion to $975.1 billion outstanding in the week ended yesterday, the Federal Reserve said today on its website. It’s the longest stretch of declines since the period ended Jan. 4 and the lowest level since the market touched $972.6 billion July 4, according to Fed data compiled by Bloomberg.
Financial borrowers have relied increasingly on central banks for funding as demand has declined for short-term obligations on concern that Europe’s sovereign-debt crisis may infect balance sheets globally. The Fed said on Sept. 13 it will expand its holdings of long-term securities with purchases of $40 billion of mortgage debt a month in an additional round of so-called quantitative easing.
“The decline in domestic financial CP outstanding is a function of the high but declining level of excess reserves in the banking system,” Howard Simons, strategist at Bianco Research LLC in Chicago, wrote in an e-mail.
Commercial paper issued by U.S.-based banks plunged $18.1 billion to $257.5 billion outstanding, the lowest level since January 2011, according to the Fed. The amount sold by non-U.S. financial institutions rose for a second week, increasing $2.7 billion to $234.7 billion outstanding, the highest level in three weeks.
IOUs issued by non-financial companies increased $200 million to $189.2 billion, compared with this year’s average of $188 billion, Fed data compiled by Bloomberg show.
“Based on tepid growth, corporations don’t see a lot of need for expansion right now,” Sean Simko, a money manager at SEI Investments Co. in Oaks, Pennsylvania, whose team manages about $3 billion of commercial paper, said in a telephone interview.
“The general trend in commercial paper continues to be downward, due to the uncertainty of funding needs based on the economy as well as the low interest rates,” which have encouraged many industrial and financial companies to push out maturities by issuing corporate bonds, Simko said.
Companies have sold $3 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 2.74 percent yesterday, according to Bank of America Merrill Lynch index data.
Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as rent and salaries.