Commercial paper market shrivels

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Commercial paper market shrivels
Outstanding short-term business loans fell by $35.9 billion to its lowest level in 8 years.
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Last Updated: May 28, 2009: 12:43 PM ET

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NEW YORK (Reuters) -- The U.S. commercial paper market shrank to the lowest level outstanding in eight years, eroded by the global credit crisis and prolonged economic downturn, Federal Reserve data showed Thursday.

For the week ended May 27, the size of the U.S. commercial paper market fell by $35.9 billion to $1.248 trillion outstanding, the lowest since 2001, according to Reuters EcoWin data. That was down from $1.284 trillion the previous week.

"I regard the data as a sign of continued stress in the commercial paper market," said Howard Simons, strategist with Bianco Research in Chicago.

Commercial paper is a vital source of short-term funding for routine operations, such as inventory purchases and payroll at many companies and banks.

"We have both a drop in demand for short-term capital, and you are not getting people to step up to the plate to supply commercial paper because the market is still dysfunctional," Simons said.

The overall U.S. commercial paper market peaked at about $2.2 trillion outstanding in August 2007, when the global credit crisis broke out.

To counteract the effects of the financial crisis, the Fed has intervened to buy a large chunk of the commercial paper market, which has stabilized prices somewhat but has not arrested the market's precipitous contraction.

Asset-backed commercial paper, a sector of the market especially hard hit by the housing bust, contracted by $8.7 billion following a $25.8 billion fall the previous week.

Unsecured financial issuance outstanding fell by $17.5 billion after rising by $3.8 billion the previous week. To top of page