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The U.S. commercial paper market shrank for a sixth week, extending the biggest slump in at least seven years and signaling Federal Reserve interest-rate cuts haven’t yet drawn investors back to short-term debt.Short-term debt maturing in 270 days or less fell $48.1 billion in the week ended yesterday to a seasonally adjusted $1.87 trillion, including a $32.1 billion decline in financial firms’ commercial paper. Asset-backed debt dropped $15.6 billion, according to the Fed in Washington.

Commercial paper investments have declined $354.5 billion, or almost 16 percent, since the week ended Aug. 8, according to the Fed. The slump began in asset-backed paper and spilled into financial companies’ short-term debt. Banks and other financial institutions have sold almost $14 billion of bonds and notes since Aug. 24, allowing them to pay off commercial paper.

“There are other funding sources that corporations are able to turn to besides commercial paper,” said Alex Roever, short- term debt strategist at JPMorgan Chase & Co. in New York. “That’s a healthy sign for the overall financial system.”

The prospect of a slowing economy, which prompted the Fed to act this week, may have caused firms to reduce sales, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.

`Supply Issue’

“The economy is not very strong,” Crescenzi said. That reduces the need for banks and brokerage firms to sell new debt to fund their day-to-day activities, he said. “The demand for money weakens when the economy weakens.”

The slide in financial sales extended a drop of $2.7 billion a week earlier.

The Fed lowered its benchmark federal funds rate to 4.75 percent and reduced its discount rate, which it charges to lend to banks, a second time to prevent a housing slump from forcing the economy into recession.

The interest-rate cut helped bring down yields on commercial paper. AA financial commercial paper 30-day yields fell to 4.72 percent yesterday, down from 5.42 percent on Sept. 5.

Financial issuers are selling longer-term debt and avoiding the risk that commercial paper won’t roll over when it matures, said James Cusser, who manages about $1.5 billion in fixed-income securities at Waddell & Reed Inc. in Shawnee Mission, Kansas.

`Until Clouds Pall’

“Financial companies may be willing to forgo all the advantages of commercial paper as long as the market is stable because they haven’t seen a liquidity event like this before,” Cusser said. The banks and brokerage may keep paying off commercial paper “until the clouds pass.”

The buyers’ freeze shut out borrowers including mortgage lenders Countrywide Financial Corp. and Thornburg Mortgage Inc. as well as GMAC LLC and investment company Cheyne Finance Plc.

GMAC, the lender owned by Cerberus Capital Management LP and General Motors Corp., last week accepted $21.4 billion in financing from Citigroup Inc. after being unable to sell commercial paper. Calabasas, California-based Countrywide borrowed its entire $11.5 billion in available bank credit lines last month to fund its operations after being unable to roll over its short-term debt.

“It’s more of a supply issue than demand,” said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts- based publisher of the Money Fund Intelligence Newsletter. “People would buy it, but issuers don’t want to issue at the price.”

Defaults Rise

Asset-backed commercial paper sellers use the cash to buy mortgages, bonds, credit card and trade receivables, as well as car loans. Because some of the programs are backed by subprime loans, where defaults had reached a five-year high, investors refused to buy the debt.

The view that purchasers of asset-backed commercial paper have driven the drop by boycotting the paper completely is a “myth that needs to be dispelled,” Maureen Coen, global head of asset-backed commercial paper origination at Credit Suisse Group, said at conference in New York yesterday.

“We all could have predicted exactly the dollar amount of decline frankly,” she said, because it was driven by exits by issuers that were forced due to program rules such as declines in the values of holdings, or that were voluntary because borrowing costs were higher in the market versus other sources of short- term debt.

Outstanding asset-backed commercial paper has slumped $253.4 billion. The declines slowed each week from a peak of $77.1 billion in the week ended Aug. 22. Sales have declined as investors balked at buying some commercial paper, shutting out some issuers.

“This means there are still players being escorted from the market,” Crane said.

Bloomberg