Fitch Ratings and Citi both published briefs on the commercial paper market yesterday, so we decided to take a look at how the CP sector overall has fared of late. The answer is: surprisingly well. CP outstandings have remained almost unchanged at just below $1 trillion throughout the period when Prime money fund assets declined by $1.1 trillion. According to the Federal Reserve's Commercial Paper Outstanding numbers show CP totaling $941.5 billion at the end of 2015 vs. $884.9 billion at the end of 2016, and vs. $937.2 billion at the end of March 2017. We discuss the CP market and review the Fitch and Citi updates below.
While commercial paper totals have remained relatively stable, money market funds' investments in CP have plunged over the past 15 months. Since Crane Data began tracking Money Fund Portfolio Holdings (in late 2010), the highest level of CP held by money funds was $419.9 billion. In October 2015, just prior to the start of the big shift of assets from Prime to Government, money funds held $394.5 billion. At year-end 2015, money funds held $343.4 billion, or 36.5% of the CP market, while at year end 2016 money funds held just $123.6 billion, or 14.0% of the market. As of March 31, 2017, money fund holdings of CP rebounded to $149.7 billion, or 16.0%.
Of course the question everyone is asking is: Who stepped in to buy CP to replace money funds? We're still trying to get a better answer on this, but our best guess is "all of the above." We think intermediate, core and other (short-term and ultra-short) bond funds were the largest buyers, but other cash buyers, such as separately managed accounts, securities lending reinvestment pools, LGIPs (local government investment pools), bank STIFs (short-term investment funds), offshore money funds and others, likely took advantage of the higher rates too. (Note: Crane Data just released a "beta" version of a new Bond Fund Portfolio Holdings collection, so watch for more details on CP holdings in bond funds in coming months.)
Fitch Ratings' release, entitled, "Downward Pressure on US Commercial Paper Ratings Evident," tells us, "Downward pressure on US commercial paper (CP) ratings due to a variety of company-specific factors amid challenging conditions in certain sectors is evident, according to Fitch Ratings. This pressure is reflected in a greater number of Negative Outlooks and watches than Positive Outlooks and watches, particularly at higher rating levels (BBB/F2 and above). The possibility of a rating change is driven by the level of the Long-Term Issuer Default Rating coupled with a Positive or Negative Outlook or watch.... There are 16 potential negative actions and four potential positive actions."
They explain, "The preponderance of Negative Outlooks and watches is due to a number of factors including weak operating trends (Caterpillar, Pitney Bowes, Viacom and Xerox); high financial leverage (Dun & Bradstreet, Hubbell, Marathon Oil, Nabors and Plains All American Pipeline); mergers and acquisitions activity (DuPont, Washington Gas Light and Marathon Petroleum) and the potential effects of the bankruptcy of Westinghouse (Georgia Power, Public Service Co. of North Carolina, South Carolina Electric and Gas, and SCANA Corporation)."
Fitch tell us, "There is a linkage between long-term and short-term ratings reflecting the importance of liquidity and near-term concerns in the assessment of long-term credit profiles and to ensure the two scales do not intuitively contradict each other for a given issuer. As a result of this linkage, CP ratings with corresponding long-term ratings at certain levels will change when the long-term rating changes."
Citigroup Global Markets' Rob Crowe writes in his latest "USCP Commentary," "The USCP market ramped up week-over-week as daily volumes averaged $91.2 billion per day vs. $87.2 billion per day last week (excluding Good Friday). In tandem, total outstandings increased (+$5.3 billion), led by non-financials (+$7.6 billion). Though prime assets decreased week-over-week (-$3.0 billion), they increased month-over-month (+$2.3 billion). According to Crane Data [and the SEC's latest statistics], the weighted average [gross] yield for prime funds was 1.03% on March 31, up 12 bps from last month, and up 48 bps from the same time last year."
He continues, "In the non-financial space, Tier-2 issuers continued to find strong liquidity from accounts, borrowing 1-month and in without having to pay up out the curve. Tier-1 issuers also found excellent liquidity from accounts, borrowing 3-months with levels relatively unchanged week-over-week. Financial levels trended tighter week-over-week as demand for bank bullets remained strong out the curve. Behind weaker economic data, many accounts scaled back their perceived pace of interest rate increases, causing fixed-rate paper to look more attractive than floating. The relative lack of floating supply allowed issuers to tighten gradually. Tier-1 banks found strong liquidity in 3- to 6-months with one Tier-1 bank printing $1.5 billion in 3-months. Japanese banks were active in 6-months."
Crowe also writes, "Post money-market fund reform in the U.S., there have been signs of more elastic dollar demand from Japanese banks as reflected in the LIBOR/OIS rates. Japanese banks matter for USD LIBOR and the CD/CP market since they tend to post the highest LIBOR submissions on average. According to Citi Research's most recent Short-End Notes, "JPYUSD basis – trade idea and 2017Q2 outlook", Japanese banks have been issuing dollar denominated corporate bonds to bolster their stable dollar funding."
On European CP, Citi comments, "SSA distribution was front and center on the week as Asian accounts showed particular interest in the sector. German borrowers accompanied by Austrian borrowers accounted for the bulk of volume and were able to print in size in USD in tenors ranging from 1- to 6-months. Total outstandings decreased (-$3.6 billion), led by financials (-$4.6 billion)."
He adds, "Corporate trading continued to be mixed as issuers contributed to a maturity driven environment. Tier-1 issuers borrowed in a combination of currencies and tenors in order to tidy up their balance sheets. A slew of high-quality U.S. issuers borrowed in size in EUR. Tier-2 issuers saw swift execution but lacked depth. Several corporate issuers from various jurisdictions had intra-quarter business to fund. Trading in Financials continued at a fair pace, with enquiries for Scandinavian, Middle Eastern, German, French, and Japanese issuers. ABCP issuers borrowed in both EUR and GBP. Inventory levels finished the week at very modest levels, as investors sought assets at the front of the curve."
