Financial companies have raced to issue cheap, short-dated debt in the US this year, sending the total amount outstanding to a decade high, as they take advantage of a “wall of cash” that is looking for a home.
Commercial paper outstanding now sits at $1.19tn, according to seasonally adjusted data from the Federal Reserve, up from a trough of below $950bn in September. In April, the amount ticked above $1.2tn for the first time since 2011.
The large increase is the latest sign of how the abundance of cash in the US financial system is rippling across short-term borrowing markets, creating headaches for investors like money market funds while at the same time providing opportunities for corporate borrowers.
International banks have tapped the market at a particularly aggressive pace: The amount foreign financial firms have outstanding clocked in at $460bn this week, from $316bn at this time last year.
US financial institutions have also increased their use of commercial paper funding this year, from around $180bn at the end of last year to more than $250bn today, reaching the highest level in three years.
Analysts pointed to the cheap borrowing costs drawing in banks looking to raise cash, with interest rates on 15-day commercial paper for financial institutions hovering around 0.05 per cent, compared with closer to 0.1 per cent at the end of last year.
“It’s just so cheap,” said Dan Krieter, a credit strategist at BMO Capital Markets. “There is a wall of cash looking to buy short-end paper.”
Some banks might also be raising cash to take advantage of discrepancies in short-term interest rates, analysts said. The Fed pays 0.10 per cent interest on excess reserves stashed at the central bank, meaning financial institutions could borrow cash in the commercial paper market and park it at the Fed and turn a profit.
A similar trade could also work lending dollars raised in the commercial paper market into other currencies.
The size of the commercial paper market tumbled from $1.15tn in March of last year after a mass withdrawal of cash from money market funds that buy commercial paper sent borrowing costs shooting higher just as companies became desperate for funding to outlast the pandemic.
It caused the market to seize up, a logjam that was only relieved after the Federal Reserve intervened. The incident prompted many companies to raise cash through bonds maturing further into the future to become less reliant on commercial paper.
Unlike financial companies, other corporate borrowers’ use of commercial paper has remained relatively flat this year, at around $200bn, well below the $320bn outstanding at the start of 2020.