The market for corporate borrowing through U.S. commercial paper dropped to the lowest level in two months as investors reduced holdings of banks' short-term IOUs on concern that Europe's fiscal crisis is spreading.
The seasonally adjusted amount of U.S. commercial paper outstanding fell $27 billion to $959 billion in the week ended Dec. 28, the fourth consecutive decline, the Federal Reserve said today on its website. That's the biggest weekly decrease since the period ended Sept. 7, bringing the market to the lowest since Oct. 19.
U.S. money-market mutual funds, among the biggest buyers of commercial paper, are reducing short-term obligations from financial institutions, which are also increasingly wary of the risks of lending to each other. Euro-area banks parked 452 billion euros ($591 billion) of overnight deposits with the Frankfurt-based European Central Bank on Dec. 27, the most since the euro's introduction in 1999 as financial strains in the region persisted.
Money funds are selling riskier assets and stockpiling Treasury bills, which are perceived to be safer, as year-end approaches, said Raymond Stone, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey. Funds "want to hold the least risky assets," he said.
Commercial paper issued by U.S.-based banks fell for a fourth week, decreasing $11.7 billion to $283 billion, the biggest decline since the period ended Nov. 9, according to Fed data compiled by Bloomberg. Securities sold by non-U.S. financial institutions fell $6.7 billion to $153 billion, the lowest level since August 2009.
Corporations sell commercial paper to fund everyday operations such as paying rent and salaries. IOUs issued by non-financial companies declined $5.8 billion to $195 billion outstanding, the lowest level since the period ended Oct. 19 the Fed said.
The London interbank offered rate that banks say they pay for three-month loans in dollars climbed to 0.581 percent Dec. 29, according to the British Bankers' Association, the most since July 2009.