Commercial paper market still shaky

LONDON (CNNMoney.com) -- Earlier this week, the Treasury Department and Wall Street banks tried to calm the nerves of investors about the state of a key short-term debt market.

They have their work cut out for them.

The Federal Reserve released figures on Thursday that showed the amount of outstanding asset-backed commercial paper declined by $11 billion to a seasonally adjusted total of $888.3 billion in the week ended Oct. 17.

The total commercial paper market, which companies and financial institutions rely on to raise funds for short periods of time, expanded by just $1.3 billion to $1.87 trillion in the latest week.

The commercial paper market froze up in the summer after the subprime crisis scared investors away from the usually safe investment. Paper backed by assets like credit card debt and home loans has been hit the hardest.

The contraction in this short-term financing market has spurred a group of big banks to take action. Citigroup Inc. (Charts, Fortune 500), J.P. Morgan Chase & Co. (Charts, Fortune 500) and Bank of America Corp. (Charts, Fortune 500) said Monday they were leading an effort to establish a so-called "super fund" to help bolster the commercial paper market.

The fund, which has the backing of the Treasury Department, will issue short-term debt and use the proceeds to buy mortgage-backed securities from structured investment vehicles, or SIVs.

SIVs issue short-term debt to invest in longer-term securities, including those backed by mortgages. The troubles in the commercial paper market have pressured them to sell their assets.

The fear is that a sell off of SIV assets could spark a downward spiral in prices of mortgage-linked securities and send more ripples of fear through the fragile credit market.

The fund aims to make it easier for SIVs to meet redemptions and refinance their paper. Commercial paper usually matures within 30 days.

The commercial paper market started to show some signs of stability earlier this month. But the latest figures from the Fed suggest investors are still nervous about delving into this part of the debt market.

The market's slight expansion was smaller than last week's $4.9 billion gain. Furthermore, the drop in outstanding asset-backed paper was bigger than the $6.8 billion decline from the previous week.

Overall, the situation has improved significantly since August, when the commercial paper market contracted by as much as $91 billion in a single week.