Key trends for commercial paper and money markets

Bloomberg Professional Services

Gavin Power, Global Fixed-Income Product Manager at Bloomberg L.P., was interviewed by Alison Fletcher, a Corporate Treasury Specialist at Bloomberg, on the reasons behind the rising interest in commercial paper, the broad spectrum of short-term investment options available to treasurers, and innovation in ESG, along with expectations for future regulations. (Lightly edited for flow.)

Can you explain why there’s currently such a strong focus on commercial paper among corporates?

The surge in interest primarily stems from two factors: escalating interest rates and persistent inflation. As the Fed has continuously raised rates, now reaching levels of over 5% — a rate not seen in nearly two decades — corporates are increasingly turning to commercial paper to manage their short-term liquidity needs more effectively.

The market’s alignment with the Fed Funds rate cycles means that as interest rates climb, so do the rates of commercial paper, offering a viable short-term funding solution in challenging conditions. Consequently, we see a significant influx of liquidity into short-term markets, with investors and corporations alike looking to commercial paper as a reliable instrument for managing their capital needs.

Beyond commercial paper, what other short-term investment options should corporate treasuries consider?

There’s a broad spectrum available. T-bills, for example, are seeing a lot of action these days. With the inverted yield curve scenario we’re experiencing, where short-term yields surpass long-term ones, T-bills are proving extremely attractive due to their risk-free nature and favorable returns.

Certificates of deposit are still yielding over 5%, aligning with the overall upward trend in interest rates. We’re looking at historic levels of activity with money market funds. Globally, there’s more than $10 trillion under management in these funds, with around $6 trillion of that in the U.S. alone. The majority is invested in U.S. Treasuries, but commercial paper and CDs also represent about 4% to 6% of these investments. And these numbers are growing. Last year, we saw increases in assets under management by 25% in the Americas, 15% in Europe, and 5% in Asia.

With the trend towards digitization, how are automation and electronic trading shaping the commercial paper market?

The traditional process for issuing commercial paper can be incredibly tedious and time-consuming. For example, the acquisition of security identifiers like UCITS and ISINs can drag on forever. In some international markets, the process can take hours, sometimes even days.

We’ve been focusing on how to cut through that red tape with technology. Our DOCP platform allows issuers to bypass traditional routes like brokers or banks and go straight to the market. Now, while it’s true that many issuers still opt for ‌conventional routes through brokers, we’re seeing more and more big players choosing to go direct. They’re seeing the benefits of getting their paper out there faster and more efficiently.

It’s clear that the global market is craving these efficiencies, and as we continue to refine and enhance our systems, we anticipate a significant transformation in how trades are conducted. This will likely lead to an inflection point where electronic trading becomes the norm across all facets of money markets.

In the context of ESG, what options do treasurers have to align their investments with sustainability goals?

ESG considerations are becoming central to investment strategies, and at Bloomberg, we’re fully equipped to support this transition. Our platforms enable treasurers to easily identify these options, making sure investments align with their corporate sustainability objectives.

For issuers to list their CP as green, they need to align their programs with ICMA principles and ESG standards. We offer a couple of flavors here. Some issuers go all-in, where every issue under their program is green. These show up with a green leaf icon right on the Bloomberg terminal. Then, there’s what we call optional green CP, where issuers might have a mixed issuance under the same program‌ — ‌some green, some not. It’s flexible, allowing them to still participate in ESG markets without being wholly committed to every issuance.

Beyond CP, we also have green money market funds. Through our FSRC function on the Bloomberg terminal, you can specifically search for money market funds that are dedicated to ESG. Right now, globally, we track 221 funds that have an explicit ESG focus. That’s a lot of options for treasurers looking to invest with an eye on sustainability.

What upcoming regulatory changes should treasurers be aware of, and what impact might these have?

Regulators have been increasing their scrutiny of the markets since the March 2020 COVID-related liquidity crisis. In response to the sudden liquidation of money market assets and the resulting market strain, there have been moves to introduce reforms such as gating fees and other regulatory measures aimed at stabilizing these funds. Some of these reforms are targeted at limiting investors’ exposure to specific programs or issuers, setting thresholds on the percentage an investor can hold to prevent over-concentration that could pose systemic risks.

These changes aren’t isolated to any one region; we expect them to have a broad impact across major markets, including Europe and the U.S. Our ongoing discussions with regulatory bodies like the FCA and others around the globe suggest that upcoming regulations will likely demand more comprehensive data accessibility. This is crucial because much of the money market instruments aren’t public; they’re private securities with limited data availability.

What’s your outlook on the future of CP and money market products?

In the short to medium term, the outlook is quite positive. Current market data and sentiment suggest that “higher for longer” interest rates could persist longer than many anticipated. With the Fed likely to maintain higher rates on the short end, we expect to continue seeing an inverted yield curve. This environment is particularly conducive to investments in cash and short-term securities, as market participants navigate ongoing uncertainties.

Additionally, while no one particularly enjoys increased regulation, the potential for new regulatory frameworks to enhance transparency and data availability could be a silver lining. These changes are likely to drive advancements that lead to greater efficiencies within these markets. I’m very bullish on the prospects for money markets and the role of technology providers like Bloomberg, which are well-positioned to help investors thrive in this hot market.