Chasing a fixed return
15 October 2013
SLT discovers what a fixed income slump will mean for lenders
Image: Shutterstock
“The markets for repos and securities lending are crucial for the trading of fixed-income securities,” said the New York Federal Reserve in a 2011 staff report.
And lending may be ever more crucial for the securities, as investors face losing out from them for the next few years.
Liquidity risk for lenders became a particular concern amid the volatile equity markets of the 2008 crisis period. Equity market declines exceeded 40 percent, borrowing demand dropped and the short-term fixed income market faltered.
“These developments exerted pressure on the liquidity of cash reinvestment pools by rapidly drawing down available cash from maturing assets and lowering the market prices of some of the pools’ underlying assets,” says Leslie Levine, a vice president in State Street’s securities finance division
Scott Thiel, deputy chief investment officer for fundamental fixed income at BlackRock, said at a recent media briefing that overall returns of the market will continue to be negative as monetary policy shifts.
With everything from bonds, derivatives or repos in fixed income severely affected by regulation, and trading revenues down, the costs of this change is beginning to show.
The Federal Reserve has led a fairly confusing goose chase over these last few months with its he-said-she-said accusations of ‘tapering’. Anticipating that the central bank would start winding down its longstanding quantitative easing (QE) programme (despite it insisting that the word tapering had never been used—nor that they had promised that September would mark the start of the process), markets panicked, and started to price accordingly in June.
However, at an 18 September policy meeting, the Federal Reserve decided not to strike off some $10 or $15 billion from its bond-buying programme.
“Taking into account the extent of federal fiscal retrenchment, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy,” said its release.
“However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
Accordingly, the committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term treasury securities at a pace of $45 billion per month.
It maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing treasury securities at auction.
“Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the committee’s dual mandate,” added the release.
Though fixed income revenues declined in summer for most of the European banks, there has been other good news for the securities. Last year, the senior vice president of eSecLending Giselle Awad said that focus on the fixed income and repo space is occurring in Australia, which is being driven by both regulatory changes and economic forces.
BondLend, a fixed income securities finance trading platform, experienced record trading by volume and value across June, July and August 2013.
A total of 172,100 fixed income trades were made via BondLend across the three months at a value of $316 billion.
That compares to 134,328 fixed income trades at a value of $188 billion in June, July and August 2012.
In the rolling 12 months to August 2013, a total of 601,778 trades at a value of $1 trillion had been made via BondLend, another record for the platform.
And lending may be ever more crucial for the securities, as investors face losing out from them for the next few years.
Liquidity risk for lenders became a particular concern amid the volatile equity markets of the 2008 crisis period. Equity market declines exceeded 40 percent, borrowing demand dropped and the short-term fixed income market faltered.
“These developments exerted pressure on the liquidity of cash reinvestment pools by rapidly drawing down available cash from maturing assets and lowering the market prices of some of the pools’ underlying assets,” says Leslie Levine, a vice president in State Street’s securities finance division
Scott Thiel, deputy chief investment officer for fundamental fixed income at BlackRock, said at a recent media briefing that overall returns of the market will continue to be negative as monetary policy shifts.
With everything from bonds, derivatives or repos in fixed income severely affected by regulation, and trading revenues down, the costs of this change is beginning to show.
The Federal Reserve has led a fairly confusing goose chase over these last few months with its he-said-she-said accusations of ‘tapering’. Anticipating that the central bank would start winding down its longstanding quantitative easing (QE) programme (despite it insisting that the word tapering had never been used—nor that they had promised that September would mark the start of the process), markets panicked, and started to price accordingly in June.
However, at an 18 September policy meeting, the Federal Reserve decided not to strike off some $10 or $15 billion from its bond-buying programme.
“Taking into account the extent of federal fiscal retrenchment, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy,” said its release.
“However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
Accordingly, the committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term treasury securities at a pace of $45 billion per month.
It maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing treasury securities at auction.
“Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the committee’s dual mandate,” added the release.
Though fixed income revenues declined in summer for most of the European banks, there has been other good news for the securities. Last year, the senior vice president of eSecLending Giselle Awad said that focus on the fixed income and repo space is occurring in Australia, which is being driven by both regulatory changes and economic forces.
BondLend, a fixed income securities finance trading platform, experienced record trading by volume and value across June, July and August 2013.
A total of 172,100 fixed income trades were made via BondLend across the three months at a value of $316 billion.
That compares to 134,328 fixed income trades at a value of $188 billion in June, July and August 2012.
In the rolling 12 months to August 2013, a total of 601,778 trades at a value of $1 trillion had been made via BondLend, another record for the platform.
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