U.S. commercial paper market shrinks as borrowing costs rise

By Richard Leong

NEW YORK (Reuters) – U.S. commercial paper supply contracted this week to its lowest level in 11 weeks, Federal Reserve data showed on Thursday, as short-term borrowing costs for companies to borrow dollars rose to levels not seen since the height of the global financial crisis.

Short-term private borrowing costs have risen in recent weeks, even in the absence of a rate hike from the Federal Reserve, due to a surge in Treasury bill supply stemming from a two-year federal budget deal reached in February.

“It absorbs a lot of front-end money,” Tom Simons, money market strategist at Jefferies & Co. in New York, said of the jump in T-bill supply. “Treasury issuance is not going down anytime soon.”

Moreover, the expected repatriation of dollars from U.S. companies linked to last year’s massive tax overhaul also has limited availability of greenbacks on the open market, analysts said.

Commercial paper, commonly referred to as CP, is short-term debt that banks, manufacturers and other firms sell to raise money to finance their loans, payrolls and inventories. Money market funds and other cash investors buy them.

The amount of CP outstanding fell by $12.5 billion to $1.081 trillion in the week ended March 14. This was the lowest level since the end of December, the Fed data showed.

Back in late January, it stood at $1.139 trillion, marking its highest level since August 2011.

Interest rates on three-month CP issued by top-tier banks were averaging 2.01 percent in the latest week, levels last seen during autumn 2008 in the aftermath of the collapse of Lehman Brothers. This compared with 1.99 percent the previous week.

Three-month rates on CP from non-financial companies were averaging 1.90 percent versus 1.85 percent the prior week, Fed data showed.

The rise in CP rates coincides with rising borrowing costs in other areas of money markets.

Earlier Thursday, the spread between the three-month dollar London interbank offered rate and three-month overnight indexed swap rate widened to 50.65 basis points, a level not seen since January 2012. At the end of 2017, it was 27.83 basis points.

The LIBOR/OIS spread is seen as a gauge of stress in money markets.

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