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Paper Economy

Commercial paper market shrinks, hitting comporations

The commercial paper market has shrunk to levels below the trough of the dot-com recession.

By Guest blogger / April 30, 2010

The market for commerical paper, central to funding US corporations, keeps shrinking.

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The Commercial Paper (CP) market is essentially a private debt market used by corporations as a cheaper means of funding typical recurring operations than drawing on a line of bank credit.

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Commercial paper, as financial instrument, is by no means a recent innovation and, in fact, you can read about how the CP market was affected by the many historic financial shocks experienced by the U.S. (read Panic on Wall Street: A History of America’s Financial Disasters)

Although the Federal Reserve was able to artificially bring CP rates down significantly since the shocking 615 basis point spread blowout (A2/P2 spread) of late 2008, they have apparently not been successful in preventing an overall contraction in the CP market.

The Federal Reserve calculates and published the total amount of CP outstanding every week and as of the latest published period, commercial paper outstanding is contracting at a fast pace, registering a whopping 22.06% decline year-over-year.

It's important to note that at $1.108 trillion, total commercial paper outstanding is significantly less now than the level seen in the trough of the dot-com recession.

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