JPM Update on ABCP: Up 20% YTD
Last week, J.P. Morgan's "JPM Mid-Week US Short Duration Update" featured a brief titled, "ABCP outstandings push 20% higher YTD amid increased equity financing demand." The piece explains, "It has been a strong start to the year for the ABCP market, with total outstandings climbing to nearly $585bn, up almost $100bn (20%) year-to-date, surpassing the pace of growth over the same period in every year since 2020.... As we have discussed previously, this year's growth, like that of the past couple of years, reflects dealers increasingly turning to the ABCP market as an alternative source of financing for both fixed income (mainly Treasuries) and equity collateral. Recall that certain ABCP structures (e.g., independent sponsor programs) can provide banks with off‑balance‑sheet solutions/optimization of funding and potentially favorable accounting treatment by using a conduit to intermediate transactions with a counterparty. In practice, this is typically executed through repo (an alternative way for the counterparty to finance high‑quality liquid assets), reverse repo (asset transfers to the conduit in exchange for short‑term cash), TRS (synthetic exposure without owning the asset outright), and securities lending (securities temporarily move onto the SPE's balance sheet when it borrows, or are acquired with ABCP proceeds and lent to the counterparty when it lends)." It continues, "More recently, the upward trend in ABCP outstandings has become even more pronounced as demand for equity financing has accelerated.... The composition of the ABCP market continues to reflect these financing trends. Independent sponsor programs have driven most of this year's growth, with outstandings increasing by $53bn to $244bn. Bank-sponsored CCP programs have also expanded, rising by $36bn to $104bn. Notably, nearly $60bn, about 60%, of this year's ABCP growth has occurred over the past two months, coinciding with higher equity financing costs and possibly contributing to the rise in independent sponsor programs to roughly 42% of total ABCP outstandings, up from about 30% two years ago.... That gain has largely come at the expense of traditional bank-sponsored multi-seller programs, typically used to finance more traditional assets, whose market share has fallen 13 percentage points to 37% over the same period." J.P. Morgan's update adds, "Looking ahead, we expect ABCP outstandings to remain elevated, especially if dealers continue to seek alternative sources of balance-sheet financing. Equity financing costs should remain spot-dependent and stay rich as long as the bull market holds.... As a result, dealers may continue to tap the ABCP market as an alternative funding source, which could further support balance-sheet optimization, particularly if equity financing needs persist, given Treasury's financing needs remain high. That said, we still believe incremental supply can be absorbed by a diverse investor base, including state and local governments, separately managed accounts, corporates, and prime money market funds. However, issuer concentration bears watching as concentration risk is emerging as a constraint. For now, additional demand likely remains available, albeit potentially at modestly wider spreads."
