Government bond lending rising as gilt yields soar
09 January 2025 Global
Image: SmileStudioAP/stock.adobe.com
In a week that saw 10-year gilt yields hit their highest level since the global financial crisis, and 30-year gilt yields their highest since 1998, government bonds have been “flying off the shelves”, Matt Chessum, director of securities finance at S&P Global Market Intelligence, tells Securities Finance Times.
“The recent sell off in government bond markets isn’t surprising, and increased positioning in the securities lending market has been offering signals of declining sentiment for a few months,” says Chessum.
He notes: “Borrowing activity in government bonds started to increase in the second half of 2024. As the year progressed a recalibration of future expectations in interest rates led to further volatility in the market providing opportunities for lenders.
“During the year, revenues increased eight per cent year-on-year to US$2.03 billion, while balances grew 10 per cent year-on-year to an average of US$1.19 trillion.”
Though the recent sell off in gilts has seen longer-dated bonds bearing the brunt, Chessum also highlights that shorter-term sovereign debt was seeing the majority of securities lending activity last year, while globally US Treasuries were in focus.
“Throughout the year there was a focus on borrowing short-dated bonds as they remain sensitive to immediate moves in interest rates.
“US Treasuries dominated borrowing activity during the year, with nine of the top 10 revenue generators being US assets,” he adds.
The increase in sovereign debt securities lending activity is not limited to the US and UK. Chessum explains: “Borrowing activity in French government bonds has been growing, currently sitting at US$103.2 billion of on loan value — its highest level post-global financial crisis.
“The same is true of Italian and Portuguese government bonds. When looking at European government bonds, value-on-loan is currently sitting at just over US$430 billion — its highest level since 2022. Inflationary pressures, increased bond issuance, and long-term debt sustainability continues to put this asset class under pressure.”
While there are a number of reasons for increased securities lending activity in government bonds, a rise in short selling may be key.
Chessum notes: “Shorting government bonds when yields are moving higher can often be a strategic move for investors due to the inherent inverse relationship between bond prices and yields — when yields rise, bond prices typically fall.
“Investors may anticipate continued increases in yields driven by factors such as tightening monetary policy, inflationary pressures, or changing economic conditions, allowing them to profit from the expected decline in bond prices.”
He also highlights the market sentiment potential of increased short selling: “Higher yields may reflect market adjustments to new economic realities, prompting investors to bet against perceived overreactions or to capitalise on price corrections.
“Shorting government bonds can also serve as a hedge against potential losses in other investments, especially in a rising interest rate environment.”
“The recent sell off in government bond markets isn’t surprising, and increased positioning in the securities lending market has been offering signals of declining sentiment for a few months,” says Chessum.
He notes: “Borrowing activity in government bonds started to increase in the second half of 2024. As the year progressed a recalibration of future expectations in interest rates led to further volatility in the market providing opportunities for lenders.
“During the year, revenues increased eight per cent year-on-year to US$2.03 billion, while balances grew 10 per cent year-on-year to an average of US$1.19 trillion.”
Though the recent sell off in gilts has seen longer-dated bonds bearing the brunt, Chessum also highlights that shorter-term sovereign debt was seeing the majority of securities lending activity last year, while globally US Treasuries were in focus.
“Throughout the year there was a focus on borrowing short-dated bonds as they remain sensitive to immediate moves in interest rates.
“US Treasuries dominated borrowing activity during the year, with nine of the top 10 revenue generators being US assets,” he adds.
The increase in sovereign debt securities lending activity is not limited to the US and UK. Chessum explains: “Borrowing activity in French government bonds has been growing, currently sitting at US$103.2 billion of on loan value — its highest level post-global financial crisis.
“The same is true of Italian and Portuguese government bonds. When looking at European government bonds, value-on-loan is currently sitting at just over US$430 billion — its highest level since 2022. Inflationary pressures, increased bond issuance, and long-term debt sustainability continues to put this asset class under pressure.”
While there are a number of reasons for increased securities lending activity in government bonds, a rise in short selling may be key.
Chessum notes: “Shorting government bonds when yields are moving higher can often be a strategic move for investors due to the inherent inverse relationship between bond prices and yields — when yields rise, bond prices typically fall.
“Investors may anticipate continued increases in yields driven by factors such as tightening monetary policy, inflationary pressures, or changing economic conditions, allowing them to profit from the expected decline in bond prices.”
He also highlights the market sentiment potential of increased short selling: “Higher yields may reflect market adjustments to new economic realities, prompting investors to bet against perceived overreactions or to capitalise on price corrections.
“Shorting government bonds can also serve as a hedge against potential losses in other investments, especially in a rising interest rate environment.”
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