The market for corporate borrowing through commercial papercontracted for an eighth week, reaching the lowest level in 21months, as issuers reduced the amount of short-term IOUs and soldlonger-dated corporate bonds, with yields at about record lows.

The seasonally adjusted amount of U.S. commercial paper dropped$19.2 billion to $924.4 billion outstanding in the week endedyesterday, the Federal Reserve said today on its website. That'sthe longest stretch of declines in a year and the lowest levelsince the market touched $916.8 billion in the period ended Jan.19, 2011, according to Fed data compiled by Bloomberg.

Borrowers are taking advantage of unprecedented low interestrates to sell longer-term company bonds and to reduce the risk of asqueeze in short-term lending amid Europe's persistent debtcrisis.

“The desire to extend maturities is a leading cause of thedecline in commercial-paper issuance, rooted in a desire amongstinvestors to increase the liquidity of their portfolios, while alsoreducing the possibility that the companies they invest in facerollover risks from an abrupt loss of market access,” TonyCrescenzi, a portfolio manager and strategist at Pacific InvestmentManagement Co. in Newport Beach, California, wrote in ane-mail.

Money-market funds' demand for short-term IOUs has declined onconcern that Europe's fiscal strains may damage credit qualityglobally, making it more difficult for companies to repay theseobligations.

European Banks

The reduction in allocations by prime money market funds toEuropean banks is another cause of the weakness in commercial-paper issuance, Crescenzi wrote.

Commercial paper sold by non-U.S. financial institutions fell$10.6 billion to $216.8 billion outstanding, the lowest level sinceJuly 25, while the amount issued by U.S.-based banks rose $1billion to $245.9 billion outstanding, the first increase in eightweeks, according to the Fed.

“Companies just don't have the demand for credit” in thecommercial-paper market, Anthony Carfang, a Chicago-based partnerat Treasury Strategies Inc., a firm that advises corporatetreasurers, said in a telephone interview. Many clients are“concerned about the fiscal cliff and therefore they are pullingback,” he said, referring to automatic spending cuts and taxincreases that could go into effect starting in January.

Corporations sell commercial paper, typically maturing in 270days or less, to fund everyday activities such as rent andsalaries.

Companies have sold $3.26 trillion of bonds worldwide this year,a pace that's second only to the record issuance in 2009, accordingto data compiled by Bloomberg. Yields on global investment-gradecompany bonds fell to an all-time low 2.676 percent Oct. 15,according to Bank of America Merrill Lynch index data.

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