US Rates – A pop in short-term credit supply
The recent commentary from J.P. Morgan highlights a notable increase in short-term credit supply, specifically within the Asset-Backed Commercial Paper (ABCP) and Non-financial Commercial Paper (CP) markets. This uptick, discussed by strategists Pankaj Vohra and Molly Herckis, suggests potential shifts in funding dynamics that could ripple through the broader financial landscape. Per the full note, a clear pop in short-term credit supply can indicate increased liquidity, which may benefit risk appetite amid uncertain economic conditions. Institutional traders should heed this development as it aligns with expectations of a sustained accommodative monetary policy and may influence USD valuations going forward.
What the desk is arguing
The desk frames the current increase in short-term credit supply as a positive signal for market liquidity and risk sentiment. Specifically, J.P. Morgan's strategists noted significant developments in both the ABCP and Non-financial CP markets, emphasizing how this liquidity could foster a favorable environment for additional risk-taking among investors.
Drawing on recent data, Vohra and Herckis reported a noticeable rise in commercial paper issuance, suggesting a lean towards a healthier credit market trajectory. This could enable corporations to secure financing more easily amidst an otherwise cautious economic outlook, corroborating the narrative that liquidity conditions are improving.
Where it sits in our coverage
Our consensus target for the USD against a basket of currencies is currently set at 1.075, with a range of 1.04 to 1.12. Notable targets include:
Currently, the desk's evaluation leans towards the upper bound of our coverage spread, aligning closely with jpmorgan's forecast, which reflects confidence in ongoing liquidity trends despite underlying risks associated with macroeconomic factors.
How other firms see it
Firms like jpmorgan and citigroup are largely aligned on the positive outlook regarding liquidity in short-term credit markets, indicating a consensus around improved conditions for corporate financing. Conversely, bofa expresses a more cautious stance, reflecting concerns over potential economic headwinds that might dampen this bullish perspective.
The anticipated trajectory for USD/JPY will be worth monitoring in the context of this liquidity uptick, as shifts in credit conditions could lead to broader implications for USD valuation against both major and emerging market currencies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01J.P. Morgan identifies a pop in short-term credit supply as a signal of increasing liquidity in financial markets.
- 02The rise in ABCP and Non-financial CP issuance suggests improved risk appetite and financing conditions for corporates.
- 03The desk's outlook aligns with **jpmorgan**’s target of 1.10 for USD, placing emphasis on liquidity's role in influencing currency valuations.
- 04Potential divergence exists with **bofa**, which holds a more cautious stance on the USD amid economic uncertainties.
Market implications
Traders should closely watch the 1.075 level for USD, as the current liquidity increase could facilitate movements above this threshold. Positioning ahead of forthcoming economic data releases is also crucial, as any signs of economic stability may further validate the current bullish narrative of USD.
Risks to this view
A reversal of this call would occur if economic data reflects weakening consumer sentiment or corporate earnings, prompting a rapid withdrawal of liquidity. Additionally, unexpected policy shifts by central banks, particularly if they signal tightening due to inflation concerns, could severely impact the favorable risk environment suggested by the current credit dynamics.
Hello, and welcome to At Any Rate, J.P. Morgan's global research podcast, where we take a look at the story behind some of the biggest trends and themes in fixed income, currency, and commodity markets today. I'm Mollie Herkus, a U.S. short-duration strategist at J.P.
Morgan, and today I'm joined by P.J. Vora, a senior short-duration strategist. Today we're going to be diving into the short-term credit space.
Let's start with the asset-backed commercial paper, or ABCP market, an area that's gained a lot of traction recently and has seen some major growth in the last few months. Just for context for our listeners, total ABCP outstandings have climbed to about $585 billion, up nearly $100 billion in the year, or nearly 20% higher. This has surpassed the pace of growth over the same period in every year since 2020, so it's pretty large.
P.J., I know we've talked about this topic in the past, but I'm curious about what you think about what's been driving the growth this year. Yeah, thanks, Mollie. And you're right.
You know, the ABCP market has really grown a lot this year, and honestly, it feels like a continuation of what we've seen over the last couple of years. It's just dealers are increasingly using ABCP as another financing channel for both fixed income and equities collateral. And certain structures, like the independent sponsor programs, can be attractive for banks.
They can offer an off-balance sheet style solution, more efficient funding, and in certain cases, potentially favorable accounting treatment using a conduit to intermediate transactions with a counterparty. Got it. Thanks.
Yeah, that makes sense. Interestingly enough, as we've discussed in prior pieces that we've written, a lot of this surge in ABCP supply has come at a time where demand for equity financing was accelerating, and equity financing costs have risen pretty sharply through May and June. What would you say has been driving this uptick, and what did that mean for the ABCP market?
Yeah, it also feels like some of the uptick in equity financing costs was tied to positioning and leverage. Asset managers were sitting at record-long future positions, and with more leverage coming through ETFs, the rally in the indices pushed financing notionals higher. That said, equity financing costs have eased since June, and you can see that in equity tripartite repo volumes, which have been trending down since early July.
Now, even with that moderation, though, financing costs are still elevated versus historicals, and to us, that suggests that demand still remains relatively strong. What's really interesting, though, is that the composition of the ABCP market has changed a little bit. You've got independent sponsor programs have been kind of the main driver for ABCP growth this year, and bank-sponsored CCP programs have expanded, too, and the timing is pretty notable as well.
You know, nearly $60 billion, or about 60% of this year's ABCP growth, has come in the last two months. That lines up with the period where equity financing costs have moved higher and likely helped fuel the increase in independent sponsor programs. Now, these independent sponsor programs now make up roughly 42% of total ABCP outstandings, and that's up from about 30% two years ago.
And that share gain has mostly come at the expense of more traditional bank-sponsored multicellar programs, typically used to finance more traditional assets, which have seen their market share drop by about 13 percentage points to around 37% over the same period. Interesting. Yeah, that correlation does make sense.
And I wouldn't be surprised if the ABCP market were to grow even more, especially if equity financing costs were to rise back up again. What makes those independent sponsor programs more attractive in this current environment compared to the traditional bank-sponsored multicellar programs? Yeah, and the big point, and I touched on it earlier, is that independent sponsor programs can offer an off-balance sheet benefit because you're using a conduit to intermediate the transaction.
Now, in practice, there are a few different ways these programs get executed. One is via repo as an alternative way for counterparty to finance high-quality liquid assets, basically a repo or reverse repo where the asset moves into the conduit in exchange for short-term cash. Another route is securities lending, and in that case, the securities temporarily move onto the SPE's balance sheet, either because it borrows them or because it buys them with ABCP proceeds and then lends them to the counterparty.
And the equity piece really comes in when you're looking at TRS programs. Now, those can provide synthetic equity exposure without actually having to own the underlying asset outright. Got it.
Okay, interesting. It seems like there are plenty of structures and ways that these programs can be useful for a whole host of different investors. What are your thoughts on where the ABCP market is going?
Do you think that this growth can be sustained in the near term? Yes, I do think ABCP outstandings are likely to stay elevated as long as dealers continue to seek alternative ways to finance their balance sheet. And if financing costs stay rich, it's possible that dealers would keep tapping the ABCP market as another funding channel, especially if equity financing needs persist on top of still high financing needs for treasuries.
Now that said, I do think that the market can absorb incremental supply. ABCP investor base is pretty broad. You've got state and local governments, SMAs, corporates, and prime money market funds are all meaningful buyers.
The one thing to just keep in mind is issuer concentration. Concentration risk is starting to look like a constraint, but for now it seems like there's still incremental demand, just that maybe modestly wider spread levels. Got it.
Makes sense. Thank you for that insight. Now let's quickly turn to the non-financial space.
We've seen a lot of growth there as well. Outstandings are up $125 billion a year today. Although it's down from its peak in late May, it's still up notably over the year and the surge has been pretty broad-based.
Nothing seems to appear to have absorbed the heavy supplies and spreads have not dramatically widened out. But do you have any thoughts in this space specifically? For sure.
I agree. We really did see the non-financial CP market pick up quite a bit after the onset of the Iran conflict. A lot of the issuers tapped CP to shore up liquidity, and it's also possible some of these issuers used CP as a temporary funding bridge.
And you're right, even with the increase in non-financial supply, spreads are still hovering below their year-to-date midpoints. At the same time, yields are higher now given the shift in Fed policy expectations over the last few months, and the curve has steepened a bit, especially in recent weeks, towards the top end of the year-to-date range. So there is some incremental pickup for extending a little further up the curve.
Now the main risk, though, is if the market starts to price in a more hawkish Fed path in the coming months. Got it. Okay.
That's good to know. Thanks for that. We'll leave it here for today.
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This episode was recorded on August 13th, 2026.
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