Commercial Paper Market Drops As Businesses Remain Jittery Over Economic Recovery
A setback that has hit the United States commercial paper market rebound as businesses remain wary of the pace of recovery of the economy. Even with a growing appetite for credit fueled by a return of some economic growth, there is still a lot of hesitation among businesses to expand their operations.
According to a data recently released by the Federal Reserve, the commercial paper market in the United States has shrunk by $94.2 billion, dropping the market to $1.076 trillion during the past week. Figures suggest that company or corporate borrowing - commonly used by businesses for day-to-day operations funding - is currently experiencing a severe drop.
Companies are instead raising short term funds for financing their operational expenses such as payrolls and inventories by selling commercial paper. This has contributed to a shrinkage in the commercial paper market. A contraction in the current market suggests that quite a few companies and businesses continue to still have doubts over the pace of this economic recovery. This present commercial paper market shrinkage is incidentally the largest weekly percentage shrinkage seen in the market in more than a decade.
Miller Tabank & Co of New York chief economic strategist, Dan Greenhaus, said that in the next one or two quarters, businesses remain uncertain and unsure over the economic expansion pace. This continuing anxiety of businesses is also fueling a demand for cash and for ultra-short-dated Treasury securities. This demand along with a promise made by the Fed to continue sticking for a prolonged period to their near-zero rate target has placed a lid over Treasury bill rates.
The minutes of the December policy meeting of the Fed indicates that the United States Central Bank may be tightening its monetary policy for this foreseeable future. Jefferies & Co. of New York money market economist Thomas Simons says, “It definitely offers support for the front end.”
The United States government is also going to be winding down its emergency support of the financial system and economy in the coming months. This action by the government should lead to fewer T-bills circulating in the market during these months. The U.S. Treasury is also selling three-month bills which amount to $24 billion and six-month bills which amounts to $25 billion on Monday. The amount for each maturity is notable $1 billion less than what the Treasury is offering this week.
The Treasury also announced that it will be auctioning one-year bills amounting to $26 billion on Tuesday which is $1 billion less than what it offered last December.
