December 2, 2010 / 3:43 PM / 9 years ago

UPDATE 2-U.S. CP market contracts to smallest since 2001

* Bank CP outstanding falls sharply on European worries

* Cash-heavy firms rely less on CP for short-term funds

* Money funds more cautious ahead of regulatory changes (Recasts lead, adds analyst quote, byline)

By Richard Leong

NEW YORK, Dec 2 (Reuters) - The U.S. commercial paper market shrank in the latest week to its lowest level since at least 2001, as cash-flush companies reduced their short-term borrowing to fund daily operations toward year-end.

Compounding the fall in commercial paper issuance was investor reticence to own securities issued by banks in peripheral European nations, analysts said.

For the week ended Dec. 1, the size of the U.S. commercial paper market contracted for a fifth consecutive week, down $44.0 billion to $1.021 trillion outstanding on a seasonally adjusted basis, Federal Reserve data released on Thursday showed.

It marks the lowest level ever, based on available Fed data dating to 2001. Total commercial paper outstanding peaked at nearly $2.223 trillion in July 2007 during the height of the housing boom on heavy activity to fund mortgages.

“This is pretty broad-based. It’s probably tied to what’s happening in Europe,” said Alex Roever, short-term fixed income strategist at J.P. Morgan Securities in New York.

Companies typically raise money by selling commercial paper to finance inventories, payrolls and other daily operations. They have been issuing more longer-dated debt in recent months rather than commercial paper and other short-dated securities in a bid to lock in historically low interest rates as a result of the Fed’s near zero interest rate policy to support the economy.

The latest decline was led by the financial unsecured segment, which contracted by $33.2 billion to $521.0 billion.

Issuance in non-financial commercial paper declined by $5.1 billion to $124.4 billion and in asset-backed commercial paper by $6.3 billion to $376.2 billion.

“We’ve got corporations which have stockpiled cash over the past couple years. There is not a lot of need to borrow” from the commercial paper market, Roever said.

Moreover, regulatory changes for the money market fund industry, which are scheduled to go into effect in early 2011, have reduced appetite for commercial paper, analysts said.

The $1 trillion U.S. money fund industry is a major buyer of commercial paper. (Editing by Leslie Adler)

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