Commercial paper plunges for second week in a row

Short-term notes on track for record declines in August amid credit crisis

The level of outstanding commercial paper plunged for a second week in a row, evidence of the severe credit crisis that has shaken Wall Street.

Seasonally adjusted outstanding commercial paper fell $90.2 billion to $2.04 trillion in the week ended Wednesday after falling $91.1 billion in the previous week, the Federal Reserve reported Thursday. Most of the decline came in asset-backed paper.

So far in August, commercial paper has fallen $144.4 billion from the level at the end of July, on track for a record monthly withdrawal in August. The previous record was $78 billion in January 2001.

Commercial paper consists of short-term promissory notes issued by corporations. It's a market that "has shown virtually no tolerance for bad credits or risky entities for more than 30 years," said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co.

"It is expected that the commercial paper market could shrink as much as $300 billion, roughly the amount of commercial paper backed by mortgage loans," Crescenzi wrote in note to clients. "The shrinkage of the commercial paper market will force companies to obtain money elsewhere. This will absolutely have a negative effect on the economy, arguably in need of offset via new liquidity from the Federal Reserve."

In the week ending Aug. 22, commercial paper backed by assets fell by $77.1 billion after dropping $48.4 billion, the Fed said.

Commercial paper in the financial sector dropped by $17 billion after falling $34.9 billion. Most of the decline was in foreign financial institutions, which fell $16.2 billion.

Commercial paper in the nonfinancial sector rose $3.7 billion.