Could Your Liquidity Portfolio Benefit from A2/P2 Commercial Paper?
Co-authored: Alexander Goldman
Abstract
The inclusion of A2/P2 commercial paper (Tier-2 CP) in institutional cash portfolios may help improve income potential and diversify risk. Data suggests that Tier-2 CP offers meaningful yield enhancement relative to comparable benchmarks and Tier-1 CP. Following the SEC’s Rule 2a-7 money market fund reforms, direct investment in Tier-2 CP has emerged as a more competitive alternative to institutional prime funds. However, Tier-2 CP carries greater liquidity and event-driven risks, along with a higher probability of credit rating downgrades to non-prime status. To effectively capture higher yields while managing risk, investors should conduct comprehensive credit analysis, evaluate macroeconomic and industry trends, and align exposure with overall portfolio liquidity needs.
Introduction to A2/P2 Commercial Paper: Insights for Investors
In 2024, our analysis of the BBB corporate debt market revealed attractive yield opportunities at acceptable risk tolerance for select Treasury portfolios. In a similar vein, A2/P2 commercial paper (“Tier-2” CP) shares many of the same characteristics as BBB-rated debt, which may make it a valuable tool for cash investors looking to diversify risk and improve income potential.
Since our last in-depth review of the commercial paper (CP) market in 2018, the SEC’s Rule 2a-7 reforms have introduced new requirements—mandatory liquidity fees and higher liquid asset requirements—that have reduced the competitiveness of institutional prime money market funds. These regulatory changes have made direct investment in CP, particularly A2/P2 CP, more attractive from liquidity and yield perspectives.
However, lower-rated CP carries greater credit and liquidity risk compared to other fixed income cash securities. Investors interested in A2/P2 CP should assess risk tolerance, credit quality, and portfolio liquidity objectives to ensure optimal greater risk-adjusted performance.
This piece provides an overview of A2/P2 CP, discussing the potential benefits of incorporating A2/P2 CP into cash portfolios. We will also explain potential risks and mitigation techniques, analyze the evolution of the A2/P2 market, and compare its credit quality and potential ratings volatility with other highly rated securities. Finally, we identify guiding principles for institutional cash investors considering A2/P2 CP as part of their portfolios.
What is A2/P2 Commercial Paper?
A2/P2 commercial paper (Tier-2 CP) refers to short-term, unsecured promissory notes rated P-2 by Moody’s, A-2 by S&P, or F2 by Fitch. Although these short-term ratings are lower than “Tier-1,” A2/P2 CP is still considered “prime,” or “investment-grade,” typically linking to long-term credit ratings ranging from the lower-end of the single-A through mid-BBB category. Issued under the Securities Act of 1933, A2/P2 CP generally carries a maximum maturity of nine months under Section 3(a)(3), or longer maturities if exempt under Section 4(a)(2)—which are further distinguished here. These securities function as an important part of short-term funding markets, offering investors an alternative to Treasury (T-bills), certificates of deposit (CDs), and money market funds. CP with a maturity of three months or less may qualify as cash equivalents, while issues with maturities up to one year are categorized as short-term securities.
The Evolution of the A2/P2 Commercial Paper Market
The U.S. commercial paper (CP) market reached its peak in 2007, with approximately $2.0 trillion in total outstandings—more than half of which consisted of asset-backed commercial paper (ABCP). However, following the Global Financial Crisis (GFC), overall CP issuance and demand declined sharply. This was due to reduced consumer credit demand, stricter banking regulations, credit rating downgrades, and corporates deleveraging their balance sheets. By 2016, total outstanding CP bottomed out at $997 billion, marking a 50% decline from its pre-crisis high. The decline was largely driven by a reduction in ABCP issuance, followed by a downturn in financial CP. Since then, the market has shown signs of a gradual recovery. By the end of 2024, total CP outstanding had risen to roughly $1.2 trillion, a 21% increase from its post-crisis low.
Figure 1: Total Commercial Paper Outstanding (in $ billions)
Source: Federal Reserve
Since the GFC, Tier-2 CP has been the only class of commercial paper to increase in total volume, highlighting the growth of this asset class. As noted in our BBB corporate debt whitepaper, the investment-grade credit space has tilted toward BBB-rated issuers, with many companies content with relatively lower investment-grade ratings. This shift has likely contributed to the continued growth of the A2/P2 commercial paper market.
Since 2007, the outstanding volume of Tier-2 CP rose 61%, climbing from $72 billion to $116 billion, representing a compound annual growth rate (CAGR) of 3.6%. By contrast, the broader CP market contracted at a 2.3% CAGR over the same period. Tier-2 CP accounted for just 3.6% of total outstanding CP in 2007, but its share has increased steadily to 9.6% by the end of 2024.
The expansion of A2/P2 CP issuance was particularly pronounced post-COVID period, supported by a resilient economy, strong corporate lending activity, and rising interest rates that dissuaded long-term borrowing at high rates. In short, Tier-2 CP (A2/P2) has evolved into a substantial and growing part of the overall commercial paper landscape.
Figure 2: Total Tier 1 and Tier 2 Commercial Paper Outstanding (in $ billion)
Source: Federal Reserve
How Ratings Migration Risk Impacts A2/P2 Commercial Paper
According to a commercial paper (CP) default study by Moody’s, the risk of downward ratings migration is greater for A2/P2 (Tier-2) CP than for Tier-1 CP. While the probability of a one-notch downgrade beyond 90 days is slightly lower for P-2 rated CP compared to P-1 rated CP, the likelihood of being downgraded to nonprime status is notably higher for P-2 CP, with this risk increasing with the length of the investment horizon.
For investors, this means the key concern in A2/P2 CP is not just downgrade noise, but the risk of “falling out” of prime eligibility altogether, highlighting the significance of proper credit analysis in selecting A2/P2 CP for limiting downgrade risk and protecting principal.
Figure 3: Average probability of a CP downgrade, 1972-2024
| Investment Horizon (Days) | Moody’s Short-term rating | One-notch downgrade probability | Probability of downgrade to NP |
| 30 | P-1 | 0.35% | 0.01% |
| P-2 | 0.37% | 0.08% | |
| 90 | P-1 | 1.04% | 0.02% |
| P-2 | 0.99% | 0.28% | |
| 180 | P-1 | 2.00% | 0.06% |
| P-2 | 1.73% | 0.61% | |
| 270 | P-1 | 2.90% | 0.11% |
| P-2 | 2.30% | 0.93% | |
| 365 | P-1 | 3.73% | 0.16% |
| P-2 | 2.74% | 1.24% |
Source: Moody’s Ratings
Default risk for P-2 commercial paper, on an absolute basis, is relatively commensurate to that of P-1 CP. The difference in default rates widens as the investment horizon increases but remains small (~1 bp).
Figure 4: Historical Average Default Rates, 1972-2024*
* Figures represent Moody’s-adjusted default rates, which exclude defaults of issuers who had no outstanding CP
Source: Moody’s Ratings
It is worth noting that default rates and loss severity in both Tier-1 and Tier-2 CP markets may be distorted by the “orderly exit” effect. Issuers experiencing credit deterioration often lose market access and stop issuing commercial paper before an actual default occurs. This can make historical default and loss data appear more favorable than it would if weaker issuers had remained active. Ultimately, an analysis of credit rating behavior suggests that the primary risk is not outright default, but rather ratings migration—particularly the risk of falling from prime to nonprime status. This reinforces the need for ongoing credit surveillance, issuer monitoring, and portfolio diversification to manage exposure and maintain principal stability within institutional cash portfolios.
Boosting Cash Portfolio Yields with A2/P2 Commercial Paper
Investors who are willing to take on the incremental credit and liquidity risks associated with Tier-2 commercial paper (A2/P2 CP) may be rewarded with higher returns. Empirical data on non-financial commercial paper rates since 1998 supports this notion of greater return potential relative to Tier-1 CP.
Because commercial paper has short maturity limits and a limited secondary market, constructing a commercial paper index or conducting a total return analysis is challenging. The most effective way for measuring incremental return potential is through observed market yields and calculating the excess spread earned by A2/P2 commercial paper.
Looking at quarterly yield data over time, the average yield spread between 90-day Tier-2 non-financial CP and Tier-1 non-financial CP has been approximately 35 basis points (0.35%). In portfolio terms, maintaining that 35 bps spread on a $100 million allocation over five years could generate nearly $1.8 million in additional income. For corporate treasurers and institutional cash managers, this addition is meaningful—particularly in low-spread environments, where every incremental basis point contributes to portfolio performance without materially increasing overall risk.
Figure 5: Yield Spread of 90-Day Tier 2 Non-financial to 90-day Tier 1 Non-financial
Source: Federal Reserve Observed Commercial Paper Rates
In 2024, the widest observed yield spread between Tier-1 and Tier-2 nonfinancial CP ranged from a high of 0.36% on September 24th to a low of 0.09% on October 15th. During the Global Financial Crisis (GFC) in 2008, this spread spiked to 6.69%, following the Lehman Brothers bankruptcy (this spread narrowed to 4.84% when compared to Tier-1 Dealer Placed CP, which includes financial CP). More recently, at the onset of the pandemic, the spread peaked at 2.07% on March 19, 2020.
As illustrated in figure 6, commercial paper yields may be contextualized using respective benchmarks following the GFC. For 7-day CP, the Federal Reserve’s lower bound of the federal funds rate (also the Fed reverse repo rate) serves as the benchmark. For 1-month maturities, yields are compared to the average 30-day return of the Crane Government Institutional Money Market Fund (MMF) index, while 3-month CP debt is benchmarked against the 3-month U.S. Treasury Bill yield.
Figure 6: Average Yield Spread over Benchmarks*
| Average 2009-3Q’25 | As of 3Q’25 | |||||
| 7-Day | 1-Month | 3-Month | 7-Day | 1-Month | 3-Month | |
| vs. FFR | vs. Govt MMF | vs. 3-month Treasury | vs. FFR | vs. Govt MMF | vs. 3-month Treasury | |
| Tier 1 Non-Fin | 0.08% | 0.18% | 0.08% | 0.03% | 0.05% | 0.02% |
| Tier 1 Fin | 0.10% | 0.19% | 0.14% | 0.09% | 0.06% | 0.11% |
| Tier 2 | 0.29% | 0.44% | 0.37% | 0.19% | 0.21% | 0.20% |
Sources: Federal Reserve Observed Commercial Paper Rates, Crane Data, Bloomberg
Based on average returns since 2009, Tier-1 CP has generally delivered a high-single-digit to low-double-digit (bps) yield advantage over its benchmarks, while Tier-2 CP has delivered significantly more.
Top Issuers Driving the A2/P2 Commercial Paper Market
For illustration purposes, we’ve compiled a list of the top 15 commercial paper (CP) issuers in each category, ranked by outstanding amounts as of August 2025. While these rankings change month to month, they provide a general picture of the major players in the U.S. CP market.
Figure 7: Top 15 CP Issuers as of August 2025
Source: JPMorgan Securities’ website of active CP outstanding as of August 29, 2025. CDS spread from Bloomberg as of 9/30/2025.
Not surprisingly, many of the top CP issuers are foreign banks. As of the snapshot date, the largest issuer was Verto Capital I, an asset-backed commercial paper (ABCP) issuer. Among U.S. institutions, J.P. Morgan, was the largest domestic bank issuer, ranking 39th overall with $9.7 billion in outstanding CP.
The largest Tier-1 non-financial issuers are more diversified by country and industry, led by Toyota, the Japanese automaker, with $15.3 billion outstanding. Notably, nine of the fifteen largest Tier-1 non-financial issuers are U.S. based.
The top Tier-2 issuers exhibit a similar industry mix, but with a greater concentration of capital-intensive sectors, namely utilities. Ten of the fifteen top issuers are U.S.-based. This skew towards regulated, capital-intensive industries can be both a risk and a source of stability, depending on regulatory frameworks, rate environments, interest rate environments, and the balance sheet policies of issuers.
Evaluating Tier-2 Commercial Paper: Not All A2/P2 Are the Same
Similar to BBB-rated debt, Tier-2 commercial paper (A2/P2 CP) issuers exhibit greater diversity in both scope and credit quality than their higher-rated peers. Empirical evidence over decades has shown that ratings for financial firms tend to be more volatile, reflecting confidence-sensitive business models, reliance on market funding, and exposure to both credit and liquidity shocks. Issuers in capital-intensive industries can also be more vulnerable due to cyclical revenues and their ongoing need for debt financing to fund large capital expenditure programs. As such, credit risk may vary considerably even among similar-rated debt. To better protect against credit migration and liquidity risk, investors should conduct credit research, focusing on company fundamentals, sector trends, and macroeconomic environments, with the goal of identifying issuers that are “Tier-2 by rating, Tier-1 by quality.”
Financials vs. Non-Financials: A primary distinction in the CP market is between financial and non-financial issuers. Financial companies, such as banks and insurance firms, are inherently leveraged and deeply interconnected with the capital markets. Their health is sensitive to interest rate fluctuations, credit cycles, and investor confidence. During periods of systemic stress, bank-issued CP can be particularly vulnerable to contagion risk, as a loss of confidence in one institution can quickly cast doubt on the stability of the entire sector. In contrast, non-financial CP, issued by industrials, retailers, and service-oriented companies, tends to have lower exposure to “blow up” risks that can rapidly erode a financial institution’s funding base. While non-financials are not immune to economic downturns, their credit profiles often evolve more gradually, making event-driven risks somewhat more foreseeable and manageable.
Protecting Your Portfolio from A2/P2 CP Event-Driven Risks
Beyond ratings migration and sector considerations, commercial paper (CP) investors must also face event-driven risks, particularly those stemming from corporate actions. Mergers and acquisitions (M&As) that are triggered through leveraged buyouts (LBOs) can abruptly and significantly alter an issuer’s credit profile. These events often unfold faster than rating agencies can respond, meaning that credit ratings may not fully reflect heighted risk until a transaction is announced or completed. Lower-rated companies are often attractive to LBO targets because of perceived upside from operational improvements, cost synergies, and balance sheet leverage to enhance returns.
M&A activity are a standard component of corporate strategy and can be credit-positive when they enhance scale, diversification, and long-term earnings power. However, in the short term, many deals introduce added risk for creditors. The financing structure of such deals often involves substantial new debt, which can weaken the balance sheet and strain key credit metrics. Additionally, integration risks can be of concern: merging distinct corporate cultures, operational systems, and product lines can be complex and disruptive. Expected synergies may fail to materialize, or integration may prove costlier and more challenging than anticipated, leading to weaker-than-expected financial performance. If a deal is perceived to materially weaken the acquirer’s financial profile or increase its business risk, it can result in a credit rating downgrade to follow.
In the case of an LBO acquisition, the acquiring company finances the merger primarily with borrowed money, relying on the target company’s assets or operating cash flows to service and repay the debt. For CP investors, the announcement of an LBO should serve as a trigger to reassess the issuer’s suitability, re-evaluate exposure size and tenor, and determine whether to reduce or exit positions before credit ratings and yield spreads fully reflect the transaction’s impact.
Additional portfolio construction considerations are important when allocating to Tier-2 (A2/P2) CP. For a deeper dive into strategic CP portfolio management, interested readers can explore our detailed analysis here.
Conclusion: Strategies for A2/P2 Commercial Paper Investors
As the Federal Reserve continues its rate-cutting cycle, investors who have already addressed their near-term liquidity needs may consider reassessing the role of how Tier-2 commercial paper (A2/P2 CP) fits within their overall cash management strategy. Historically, Tier-2 CP has provided incremental yields averaging 35 basis points above comparable Tier-1 CP, which can translate into nearly $2 million in additional income for a $100 million portfolio over a 5-year time period.
The incremental risk of a Tier-2 portfolio is manageable and can be further tempered through sector selection and a conservative credit approach. In a declining interest rate environment, supplementing an investor’s liquidity portfolio with Tier-2 CP may help investors maintain a relatively higher-yielding portfolio over time without sacrificing too many safeguards in safety and liquidity.
* Due to calendar effects, yield data as of quarter- and year-ends may not be fully representative of the market on normal days. On these dates, borrowers’ funding needs may differ with an eye towards regulatory liquidity requirements and balance sheet appearance. Some data distortion is unavoidable and difficult to correct.
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