(Recasts, adds background)
NEW YORK Oct 6 The size of the U.S. commercial
paper market deflated to its smallest in at least 16 years in
step with a rapid shrinkage of institutional prime money market
fund assets ahead of new regulations that will go into effect
next week, Federal Reserve data showed on Thursday.
U.S. seasonally adjusted commercial paper outstanding fell
$30.2 billion to $916.3 billion in the week ended Oct. 5, the
lowest level going back to 2000 with the available Fed data.
The accelerated decline of commercial paper purchases by
prime funds in recent weeks have increased the short-term
corporate borrowing costs, analysts said.
Companies issue commercial paper 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 Security and
Exchange Commission rules on share prices, redemption and fees
which are scheduled to take place on Oct. 14.
In a year, this type of funds which had been major buyers of
commercial paper has shifted about $1 trillion of assets into
the government-only category, according to iMoneynet data.
Assets of institutional prime funds tumbled by $122.30
billion to $223.33 billion in the week ended Oct. 4, marking its
biggest single-week drop in eight years, iMoneyNet said on
That drop was worth $262.96 billion in the week of Sept. 23,
2008 after the Reserve Primary Fund's share value fell below $1
or "broke the buck" shortly after the collapse of Lehman
Brothers during the global financial crisis, according to
Non-seasonally adjusted commercial paper outstanding - which
some analysts consider a more reliable reading than the
seasonally adjusted one since it has been distorted by the
financial crisis - fell $32.5 billion to $929.6 billion.
This was also the lowest level for this data series going
back to 2000.
(Reporting by Richard Leong; Editing by Marguerita Choy)