Last week, J.P. Morgan Securities published a brief titled, "Taking a closer look at the ABCP market." They tell us, "After nearly a decade of stagnation, the ABCP market is experiencing somewhat of a resurgence in activity. For years, market outstandings bounced around $200-$250bn, but since 2021 they have been steadily on the rise, registering $425bn as of February month-end.... Notably, fueling the growth of this sector has not been the traditional bank sponsored, multi-seller conduits. Instead, it has been driven by collateral-backed ABCP programs such as independent sponsored ABCP and bank sponsored CCP programs." (Note: Please join us for our upcoming Bond Fund Symposium, which is March 27-28 in Newport Beach, Calif!)
The piece explains, "Based on DTCC data, we estimate the former has grown from ~$40bn in early 2019 to now $140bn, increasing their share of the ABCP market to 33%.... The latter has also seen growth, albeit to a smaller extent: bank sponsored CCP program outstandings have grown from ~$30bn to ~$80bn over the same time frame. Meanwhile, bank-sponsored multi-seller programs have grown by only $40bn to ~$190bn, and Funding Agreement-backed (FA) programs have remained relatively stable."
JPM writes, "As we have previously noted, the rise in independent sponsored ABCP outstandings have been predominately driven by dealers looking for alternative financing to help fund both fixed income (mainly Treasuries) and equity collateral.... Given their off-balance sheet treatment and the ability to tap a pool of liquidity and duration beyond the usual fixed income repo or TRS investors, these programs not only provide a cheaper source of financing but also diversification benefits."
They state, "To that end, not only have outstandings of these programs grown, but so have the number of independent sponsor programs as both domestic and foreign dealers look to independent sponsors to help fund collateral on their balance sheets. By our count, there are currently 49 independent sponsor programs available, a significant increase from 17 just a couple of years ago. Each independent sponsor ABCP program is usually linked to a single-seller (i.e., one dealer) and sometimes one type of collateral."
JPM asks, "Who are the buyers of these programs?" They reply, "Prime MMFs buy a decent amount. They have steadily increased their allocations to ABCP over the past couple of years and now hold nearly 20% of the total ABCP market.... As of the end of January, prime funds held $81bn in ABCP, up significantly higher than the $43bn two years ago. More notably, they have shifted more of their ABCP holdings towards independent sponsor programs, now allocating nearly 40% to these programs compared to 28% last year.... `There has also been a slight uptick in bank-sponsored CCPs, which now make up 21% of their ABCP holdings, up from 12% in January 2024. These shifts have been offset by a decline in bank sponsored multi-seller programs, which now account for just 40% of the total ABCP held by prime funds, down from nearly 60% last January."
They comment, "Transparency into other buyer types are unavailable, `though we suspect the buyer base is similar to CP in general: state and local governments, securities lenders, SMAs, and low duration bond funds. We would note, however, that the investor base across repo, ABCP, and CP more broadly is quite similar, as well as the underlying credit exposures to banks/dealers, so the additional funding capacity these investors might provide to banks/dealers might be more incremental than substantial."
Finally, they add, "From a pricing perspective, ABCP trades cheap to unsecured bank CP/CDs by about 5bp.... It's worth mentioning that despite the spread tightening observed in the unsecured bank CP market, ABCP has not experienced the same degree of tightening. With ABCP supply expected to continue to increase slightly further, this should keep ABCP spreads firmer on a relative basis in the near term."
In other news, Bloomberg writes "Short-Term Bond ETFs Rake In Billions Amid Recession Alarm Bells." The article explains, "Investors looking for a safe place to hide are shoveling money into ultra-short bond exchange-traded funds as Donald Trump's economic policies stoke recessionary concerns and a stock-market rout. The cohort has taken in more than $16 billion so far this year, led by products such as the iShares 0-3 Month Treasury Bond ETF (SGOV), which has seen more than $7 billion come in. The fund took in $1.4 billion last week alone, its largest inflow on record, data compiled by Bloomberg show."
It continues, "And investors have added $3.2 billion to the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), about half of which came in last week in what is its biggest inflow since November 2023. Other funds focused on ultra-short-term debt have also taken in massive amounts of cash. The JPMorgan Ultra-Short Income ETF (JPST) has seen inflows of $3 billion this year."
The piece adds, "Inflows into bond ETFs with short durations tend to accelerate during periods of stock-market turbulence, according to an analysis by Bloomberg Intelligence. Data going back to 2013 show that flows into the category during down months for the S&P 500 averaged $2.7 billion, compared with $440 million in months when it gained. The flows can be seen as a 'useful measure of market sentiment' given that ETF investors tend to react quickly to market-moving events, wrote BI's Athanasios Psarofagis in a recent note."
