US commercial paper market shrinks a 2nd week -Fed

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By John Parry

NEW YORK, Sept 2 (Reuters) - The U.S. commercial paper market contracted sharply for a second straight week as the slowing economy cooled demand for business credit and companies continued to issue longer term debt, Federal Reserve data showed on Thursday.

For the week ended Sept. 1, the size of the U.S. commercial paper market, a vital source of short-term funding for companies' day-to-day operations, fell by $22.9 billion to $1.064 trillion outstanding from $1.087 trillion the previous week.

The market is at its smallest size in two months and is roughly half its $2.2 trillion peak in August 2007 when the credit crisis broke out.

The contraction of the commercial paper market "is all part and parcel of lack of demand for short term credit," said Howard Simons, strategist with Bianco Research in Chicago.

Companies continue to refinance debt into longer-dated corporate notes and bonds while borrowing costs remain low.

Some big banks and companies ran into trouble with short-term debt as rates jumped in the global credit crisis. Since then, many have sought to lengthen the maturity of their debt.

Another factor that is curbing commercial paper issuance is that many companies are flush with cash and are not generating much asset-backed or mortgage-backed commercial paper right now, Simons said.

Asset-backed commercial paper outstanding slipped by $300 million to $428.1 billion outstanding, after falling by $13.0 billion the previous week.

Unsecured financial issuance fell by $10.7 billion to $499.2 billion outstanding. (Editing by Padraic Cassidy)