Tactically, heading into the end of 2024, we recognized the balance sheet constraints that occur at each year-end and anticipated short-term commercial paper (CP) yields rising vs. US Treasury Bills.
If you are familiar with “bond speak” — the jargon that bond traders and investors use to communicate — you know “to lift” an offer means to purchase a bond, and to “hit” a bid means to sell a bond.
In a similar vein, January was a bonafide “lift-a-thon” — meaning those investing in cash for their funds, accounts and strategies were buying everything offered and not asking questions. This was a wonderful market for issuers as they were in control and able to dictate the price of their offering and the cost of their funding. It was not so great for investors as they had to bend the knee and accept what was offered for fear of losing the bonds to a competitor and missing out on the investment. But the good news was: the market was cheap and those purchases added good value for the strategies.
The US Federal Reserve (Fed) meeting in January was a non-market moving event. Investors were left with the prospect of the Fed’s policy rate being on hold for the near term. This perpetuates the demand for CP and other fixed rate investments as portfolio managers want to push their yield further out the curve and secure their returns.
Helping the demand has been the supply of CP. Volumes have increased, though not to a notable degree; instead, a change has come in the type of CP that’s being issued.
Figure 1 illustrates the slow growth in CP outstanding over ten years (up 21%), as well as the more prominent change in composition. Total ABCP is up 53% and Financial Domestic (US banks) is down by 9% over the period, while Financial Foreign (foreign banks) is up by 40%. Non-Financial (corporations) has seen minimal change, a logical result as corporations tend to prefer to secure their funding on a longer-term basis.
Figure 1: US CP — Outstanding Balances
Commercial Paper Outstanding Balances
Total CP | ABCP | Corp | Non US Bank | US Bank | |
Current | 1251 | 360 | 286 | 364 | 239 |
6M ago | 1168 | 307 | 265 | 357 | 237 |
Change | 7% | 17% | 8% | 2% | 1% |
1Y ago | 1230 | 323 | 290 | 358 | 257 |
Change | 2% | 11% | -2% | 2% | -7% |
2Y ago | 1250 | 296 | 292 | 428 | 234 |
Change | 0% | 21% | -2% | -15% | 2% |
5Y ago | 1150 | 254 | 307 | 348 | 241 |
Change | 9% | 42% | -7% | 5% | -1% |
10Y ago | 1033 | 235 | 275 | 260 | 262 |
Change | 21% | 53% | 4% | 40% | -9% |
Source: US Federal Reserve, Bloomberg, as of 6 February 2025.
Banks, on the other hand, make it their business to borrow short and lend long. And the noticeable change is that US banks are finding it cheaper to shift their liabilities into ABCP vehicles rather than funding them directly with CP.
This is partly due to regulations that require longer-term funding for banks and the demand for shorter-dated ABCP issuance. We can see this in the issuance patterns in Figure 1. Over the past five and ten years, ABCP issuance is up 42% and 53%, while US bank CP has declined over both periods. Additionally, the number of ABCP programs has increased, with specific programs available depending on funding needs ranging from simple repo programs to more complex assets.
Tactically, heading into the end of 2024, we recognized the balance sheet constraints that occur at each year-end and anticipated short-term CP yields rising vs. US Treasury Bills.
This can be a tricky part of the year because liquidity is thin, issuance is light and everyone is on vacation. We chose to build our liquidity with this in mind. Come the new year, as markets reopened, we saw the opportunity to put money to work at attractive rates, and thus we were a participant in the “lift-a-thon.”
As we look ahead, we expect the market to continue to rally amid positive technicals (strong demand and modest issuance) and an expectation that the Fed could be on hold for the first half of the year. This allows managers to place money further out the money market curve and keep strategy yields at attractive levels for investors.