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(Adds background, CP rates)
NEW YORK, Oct 13 (Reuters) - 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 Fed data.
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 the crisis.
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 assets.
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)