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As the pool of these unutilized bond supplies build,
leading asset owners have opted to internalize their
repo and reverse repo trading to enhance their
cash management. In the U.S., this move is being
supported by the Federal Reserve’s recent decision
to extend their reverse repo facility to the cash
investment funds of 23 asset managers.
The move to insource repo trading represents another
step in the un-bundling of lending services. With this
capability shifting in-house, asset owners are better
positioned to reduce their cash reserves via reverse
repo, create a dual-use strategy for their bonds as a
source of collateral to more easily lend portions of
their cash to longer-term trades.
Armed with this toolset, market-leading institutions
are even expanding their view of cash management
to work with their treasury teams and to look across
their internal obligations and create a holistic cash
strategy for their entire organization.
Margins on Government Bonds Require
High Volume Transactions
Whereas bonds only make up 2% of the lendable
asset pool in Asian countries, Markit data shows that
figure to be much higher at about 1/3 of the asset pool
in both North America and Europe. This is shown in
Chart 20.
As was the case in lendable equities, the same large
nations dominate the lendable bond market. Asset
owners in the U.S. are the predominant suppliers in
North America representing 79% of the lendable
bond assets. Asset owners from Germany, France and
the U.K. dominate the European lending landscape
with their supplies representing 63% of the lendable
bond assets and Japan is the only measurable lender
of bonds in Asia being cited by Markit.
The differential between lendable equity and lendable
bond spreads is signficant. This is particularly the
case for sovereign debt securities where prices have
become severely deflated due to post-Crisis interest
rate policies.
Chart 21 shows that the average lendable spread for
U.S. government bonds was only 6 basis points in
Q1 2014 and approximately 11 basis points in Western
Europe, Canada and Japan. Even the Eurobonds being
offered by the Nordic and Benelux countries as well as
the Southern European countries are only averaging
lendable spreads of about 16 basis points. To achieve
adequate spreads to justify the balance sheet impact
and costs of performing government bond loans at
these rates, extremely large volume transactions are
required, but the capital impact of such transactions
is significant.
Section III: Many Asset Owners Internalize Repo
to Enhance Cash Management
Chart 20: Breakdown of Lendable Supply:
Equities vs. Bonds
Asia
•
including
Hong Kong & Japan
North
America
EMEA
(Equities & Bonds)
0
100%
60%
40%
80%
20%
*Asia includes: Australia, South Korea, Taiwan, Singapore, Hong Kong and Japan.
North America includes: Canada and U.S. Europe includes: Euro Bonds, Nordic
and Benelux countries,Western European & Southern European countries.
Source: Markit Q1 2014
90%
50%
30%
70%
98%
34%
10%
66%
32%
68%
2%
Equities as % of Lendable Supply Bonds as % of Lendable Supply
Margins on bond lending are sufficiently thin as to make these assets difficult to loan in the
current environment. Low interest rates, the impacts of Basel III and the shift toward intrinsic
lending are all impacting the willingness of many asset owners to keep bond assets in their
lending programs.