(Adds background, CP rates)
NEW YORK Oct 13 The size of the U.S. commercial
paper market shrank to its smallest in at least 16 years as more
prime money market fund assets have fallen further in advance of
new industry rules that come into effect on Friday, Federal
Reserve data showed on Thursday.
U.S. seasonally adjusted commercial paper (CP) outstanding
fell $13.4 billion to $902.9 billion in the week ended Oct. 12,
which was the lowest level going back to 2000 with the available
Companies issue CP to raise cash to finance their
inventories and payrolls, while financial institutions use
proceeds from these short-term debt to fund their trades.
Institutional prime money funds have been converting over to
government-only funds in a bid to be exempt from the new U.S.
Securities and Exchange Commission rules on share prices,
redemption and fees.
The rules require institutional money funds to float their
share price from $1 and/or impose fees and limits on redemption
during periods of market turbulence. The rules are aimed to
safeguard the money fund sector that was roiled eight years ago
after the Reserve Primary Fund's share value fell below $1 or
"broke the buck." That fund held a large amount of Lehman debt
whose values plunged when the investment bank collapsed in
September 2008 during the global financial crisis.
Reduced purchases of commercial paper among institutional
prime funds in recent weeks have increased some gauges of
companies' short-term borrowing costs to levels not seen since
In a year, prime funds which had been major buyers of
commercial paper has shifted over $700 billion of assets into
the government-only category, according to iMoneynet.
Assets of institutional prime funds tumbled by $57.84
billion to $165.49 billion in the week ended Oct. 11, iMoneyNet
said on Wednesday.
Non-seasonally adjusted commercial paper outstanding fell
$5.8 billion to $923.8 billion. Some analysts consider it a more
reliable reading than the seasonally adjusted one since it has
been distorted by the financial crisis
This was also the lowest level for this data series going
back to 2000.
The interest rates on commercial paper that matures in 30
days or longer have risen with the shrinkage of prime fund
On Wednesday, interest rates on 30-day commercial paper from
AA-rated non-financial companies averaged 0.49 percent, reaching
its highest level since late 2008, Fed data showed.
(Reporting by Richard Leong; editing by Grant McCool)