What is commercial paper?

Commercial paper (CP) is an unsecured, short-term debt instrument issued by corporations, financial institutions, and other large entities to meet immediate funding needs such as payroll, inventory purchases, and accounts receivable financing. CP maturities range from 1 to 270 days (the maximum allowed without SEC registration), with most issues maturing within 30 days. Because it is unsecured, only issuers with strong credit ratings (typically A-1/P-1 or higher) can access the commercial paper market.

The commercial paper market is divided into financial and nonfinancial segments. Financial commercial paper is issued by banks, broker-dealers, and finance companies to fund their operations and lending activities. Nonfinancial commercial paper is issued by corporations across all industries. Total outstanding commercial paper in the US typically ranges from $1 to $1.2 trillion, making it one of the largest segments of the money market.

Money market funds are the primary buyers of commercial paper, making the CP market deeply interconnected with the money fund industry. This connection creates systemic vulnerability: when money market funds experience redemptions, they may reduce CP purchases, forcing issuers to find alternative (and potentially more expensive) funding. The September 2008 freezing of the commercial paper market following Lehman Brothers' bankruptcy was one of the most dangerous moments of the financial crisis, as corporations suddenly lost access to their primary short-term funding source.

For macro analysis, the commercial paper market serves as a real-time barometer of short-term funding conditions. The spread between commercial paper rates and Treasury bill rates measures the credit and liquidity premium in corporate short-term borrowing. Widening CP-T-bill spreads signal growing stress in corporate funding markets. The Fed created the Commercial Paper Funding Facility (CPFF) during both the 2008 crisis and the March 2020 crisis to backstop this market, underscoring its systemic importance to the functioning of the broader economy.