CAG on Tier 2 Commercial Paper
A blog posted on "Linked In" by Capital Advisors Group titled, "Getting Under the Hood," tells us, "Tier-2 commercial paper may offer a potential for additional yield. But realizing that opportunity requires looking beyond the rating to understand the underlying credit quality and assessing whether the incremental yield is appropriate given the additional risk. As money market reforms continue to influence cash investment strategies and drive more money toward Government and Treasury money market funds, A2/P2 -- or Tier-2 -- commercial paper may offer institutional investors an alternative investment option and potential for additional yield." They write, "At first glance, the opportunity may seem straightforward: take on somewhat more credit risk in exchange for additional yield. But the rating is only the starting point. Tier-2 commercial paper continues to be a viable investment for cash portfolios and a possible alternative to MMF investments. However, the underlying business dynamics of issuers can vary considerably. Our focus is on corporate issuers rather than financial issuers within the A2/P2 universe. We then evaluate these corporate issuers to identify those that we believe exhibit characteristics consistent with what we call 'Tier-2 by rating, Tier-1 by quality.'" The post adds, "The additional yield only tells part of the story. The more important question is what's driving it -- and whether the underlying credit fundamentals and business dynamics support the pickup in yield."
