Short-term debt slump continues

The U.S. commercial paper market shrank for a third week, extending the biggest slump in at least seven years and signaling that the Federal Reserve’s attempts to lower borrowing costs have had a limited effect so far.

Asset-backed commercial paper, which accounted for half the market, tumbled $59.4 billion to $998 billion in the week ended Wednesday, the lowest since December, according to the Federal Reserve.

Total short-term debt maturing in 270 days or sooner fell $62.8 billion to a seasonally adjusted $1.98 trillion. The yield on the highest-rated asset-backed paper due today rose Thursday 0.11 of a percentage point to a six-year high of 6.15%.

Commercial paper outstanding has fallen $244.1 billion, or 11%, in the last three weeks, as the Fed’s Aug. 17 reduction in the discount rate has yet to entice buyers back into the market. Yields of asset-backed commercial paper due today rose to a six-year high as investors fled to the safety of Treasury bills.

“I don’t think the Fed understands how critical the situation is,” said Neal Neilinger, co-founder of NSM Capital Management in Greenwich, Conn. “The market is going to overshoot itself and not lend money to people who deserve it.”

The 11% decline over three weeks is the biggest since 2000, according to data compiled by Bloomberg.

Commercial paper is bought by money market funds and mutual funds that invest in short-term debt securities.

In the case of asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables, as well as car loans. Some of the programs are backed by sub-prime loans.

The Fed “failed to bring money markets back to normal,” said John Lonski, chief economist at Moody’s Investors Service in New York.