Commercial Paper Falls to Record Levels at Record Pace

posted by Nima

July 17, 2009 · Posted in General Economics

Bloomberg reports Commercial Paper Falls Most Ever as ConEd Sells Bonds :

The U.S. commercial paper market, the cheapest source of corporate cash, is shrinking at a record pace, raising the cost of capital for borrowers from Consolidated Edison Inc. to Kellogg Co.

The market for company debt due within nine months has plunged 28 percent since April 8 to $1.1 trillion, its longest and deepest slump, Federal Reserve data show. Investor demand for all but top-rated commercial paper, or CP, evaporated after September’s collapse of the $62.5 billion Reserve Primary Fund sparked a run on money-market accounts, and as the recession sapped companies’ need for short-term credit to expand.

Proposals from the U.S. Securities and Exchange Commission in June may worsen the slump by restricting money-market funds, which hold 40 percent of the paper, to only top-rated debt. That would force more companies to sell bonds that may cost an extra 8 percentage points in interest, or $8 million a year for every $100 million borrowed.

Below please find the Federal Reserve’s current chart for commercial paper outstanding:

Graph of CP Outstandings: Weekly Wednesday, Seasonally Adjusted, Date vs. Billions of Dollars.

Commercial paper is falling to new lows at a record pace, with asset backed paper falling most and fastest. But financial and non-financial paper it is only slightly below where it was at the beginning of 2004. Thus this trend is more than likely to continue. This is the corrective phase of the business cycle in action.