commercial paper, inventory restocking, gdp, C&I loans

NEW YORK, Oct 29 (Reuters) - The U.S. commercial paper market rose for an 11th straight week, Federal Reserve data showed on Thursday, reflecting a broader credit market recovery as the economy started to rebound from a long recession.

In one of many signs that credit markets are repairing themselves in the aftermath of the global financial crisis, the commercial paper market is flowing much more smoothly than a few months ago, analysts say.

"The commercial paper market is in the healing process and consistent with the rest of the recovery we're seeing," said Howard Simons, strategist with Bianco Research in Chicago. The U.S. central bank stepped in to rescue the market from a frozen state last year.

This is now the longest-running expansion of the market for commercial paper -- a vital source of short-term funding for daily operations at many companies -- since May and June 2007, before the credit crisis began. Cumulative gains in the past 11 weeks are $302 billion, or a 28 percent increase in the size of the market, noted Tony Crescenzi, market strategist and portfolio manager with Pacific Investment Management Co, in a research note.

Companies are issuing commercial paper to finance restocking shelves and to meet an upturn in demand, analysts said.

"It's a good sign," said Howard Simons, strategist with Bianco Research in Chicago. "It's consistent with things like inventory restocking."

For the week ended Oct. 28, the size of the U.S. commercial paper market rose by $10.6 billion to $1.377 trillion outstanding from $1.366 trillion outstanding the previous week.

Separately, the government said Thursday that U.S. gross domestic product expanded by 3.5 percent in the third quarter, ending the long running recession.

"The increase in commercial paper issuance fits with recent data on industrial output, and the two tend to go hand-in-hand," wrote Crescenzi.

"As a result, commercial paper issuance tends to increase alongside inventory investment, which has been a major driver of the recent rebound in factory activity," Crescenzi added.

However, it may take years for the market to regain its size before it was dramatically eroded by the global credit crisis. Some analysts believe the disappearance of heavily leveraged participants may stop the market from hitting its peak of $2.2 trillion outstanding in August 2007, when the credit crisis broke out.

U.S. asset-backed commercial paper slipped to $543.0 billion outstanding in the latest week from $548.6 billion outstanding last week.

Unsecured financial issuance outstanding rose by $20.9 billion after increasing by $27.9 billion in the previous week.

While financial institutions are now able to issue debt quite freely, analysts are concerned that bank lending to businesses and consumers remains constrained, which could stymie a sustained economic recovery



"It would be nicer to see a pick-up in commercial bank lending, which you haven't seen at all," Simons said.

Increases in commercial paper issuance typically coincide with increases in the amount of commercial and industrial loans (C&I) outstanding, "but this is not what is happening," noted Crescenzi of Pacific Investment.

In contrast to commercial paper issuance, the amount of C&I loans outstanding has fallen for 15 straight weeks -- by a cumulative $118 billion to $1.382 trillion, according to Crescenzi. (Reporting by John Parry and Walden Siew; editing by Chizu Nomiyama and Jeffrey Benkoe)