UPDATE 1-U.S. commercial paper market shrinks in week – Fed

(Adds details from latest data)

NEW YORK, May 6 (BestGrowthStock) – The size of the U.S. commercial
paper market shrank for the first time in three weeks, prompted
by rising risk aversion tied to anxiety over Greece’s fiscal
woes, Federal Reserve data on Thursday showed.

Investors have grown increasingly worried that the Greek
debt crisis will take a toll on euro zone growth and the
region’s banking system. Interbank lending rates have risen,
while global stock markets have tumbled on those worries.

For the week ended May 5, the size of the U.S. commercial
paper market, a vital source of short-term funding for
companies’ day-to-day operations, fell to $1.102 trillion
outstanding, down $6.5 billion from the previous week.

Some analysts said large investors such as money market
funds will reduce their holdings in bank commercial paper on
persistent uneasiness that the sovereign debt problem in the
euro zone could snowball into another global credit crisis.

Money market funds could reallocate between $100 billion to
$200 billion of their holdings in bank commercial paper and
related securities in favor of less risky T-bills and
repurchase agreements. This would cause a spike in the London
interbank offered rates (Libor) and other bank-to-bank
borrowing costs according to Barclays Capital money market
strategist Joe Abate.

“Given the importance of money funds in providing bank
funding, we believe a modest reallocation away from bank paper
and toward repo and bills could have a significant effect on
Libor,” Abate wrote in a research note late on Wednesday.

Libor is a rate benchmark for about $370 trillion in
financial products worldwide.

The Fed’s latest data showed unsecured commercial paper
(CP) outstanding issued by banks and other financial companies
fell $7.4 billion, compared with a $23.5 billion rise in the
prior week.

Foreign financial CP outstanding fell $2.8 billion,
following a $9.2 billion drop the previous week.

In this week’s lone bright spot, the asset-backed CP
segment grew for a fourth straight week. It expanded by $4.4
billion, following a $5.0 billion increase in the prior week.
Investment Analysis

(Reporting by Richard Leong)

UPDATE 1-U.S. commercial paper market shrinks in week – Fed