The proportion of government bonds on loan across the globe
moved in line with equities last year, reflecting what ISLA
describes as a now "permanent demand" to borrow high quality
liquid assets (HQLA).
Some €800 billion of government bonds were on loan at
the end of 2016 according to ISLA - the securities lending
trade body - a 19% increase over six months.
In the post Trump election trading bubble, equity on loan
balances peeked at circa €940 billion globally around the
20th December, only to fall by 8% in the final trading days of
the year as borrowers returned open equity loan
It meant that the value of government bonds on-loan globally
accounted for 45% of the global on loan balance and matched
equities for the first time since ISLA started tracking
securities lending data in depth.
"Equity balances appear to be reduced disproportionately
with priority being given to fixed income HQLA business,"
ISLA’s experts wrote in the group's sixth
securities lending market report.
Meanwhile, nearly a quarter (24%) of all loans of government
bonds were for periods of 3 months or more.
These term trades show the desire of banks to borrow
government bonds as part of their management of the LCR.
LCR, short for the Liquidity Coverage Ratio, was introduced
see whether a bank could survive a 30-day liquidity shock set
at a fairly extreme level.
It requires banks to maintain a stock of HQLA such as
"As banks have less capacity and appetite to hold equities
on their balance sheets for trading and inventory purposes,
they simply exit these markets either on a temporary or
permanent basis," ISLA's report states.
"This in turn drives them to pledge other forms of non-cash
collateral, most notably government bonds, as equities become
less available for collateral purposes."
HQLA demand rising, supply
At the same time as the increased demand from banks to
access HQLA, the available pool of government bonds has in fact
In North America whilst availability remained fairly flat at
€1.4 trillion, on-loan balances increased by over 20% from
€384 billion to €463 billion, pushing utilisation
rates from 26% to 32% over the period.
In Europe, ISLA saw the same pattern of declining
availability combined with increased lending volumes but at
generally lower levels.
The factors driving this dynamic may be varied but in part
could reflect the ECB's purchases that are active in all of the
larger government bond markets in Europe.
"What is apparent is that there is a convergence of broader
liquidity issues being driven by specific regulatory regimes,"
the report claims.
On the one hand, the introduction of prudential capital
measures has put considerable pressure on the equity lending
markets around reporting dates, which inadvertently support
various hedge fund strategies and hedging activities.
On the other, ISLA sees this in relation to the bond markets
where scarcity could potentially be an indirect consequence of
the ECB's asset purchases.
"If these trends persist, notably as further regulations
such as Net Stable Funding Ratio are implemented, we could see
further stress in the broader financial markets," ISLA