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Securities Lending Market Report | December 2022

>>> Fixed Income

The second half of 2022 saw strong performance for Fixed Income in Europe, revenues on European Government Bonds
culminating at USD 250m for H2. This has been motivated by continuing trends such as the rise of interest rates and a particular
issue in Europe with the Gilt market crash.
The European Central Bank, who had held off increasing interest rates through the first half of the year, began its increase campaign
in July, increasing the rates by 250bps over the course of H2 2022. This was the first time in 11 years for the ECB to increase
rates and they did so on four consecutive occasions, leading rates into positive territory. Likewise, the Bank of England pursued the
increase of its interest rates, moving from 1.25% in June to 3.5% in December.

Fig 3 - European Central Bank (ECB)

ECB Interest Rates Evolution - 2022

3
2.5

2
1.5
1
0.5 The European Central Bank, who had held off
increasing interest rates through the first half
0
Jan 22 Feb 22 Mar 22 Apr 22 May 22 Jun 22 Jul 22 Aug 22 Sep 22 Oct 22 Nov 22 Dec 22
of the year, began its increase campaign in
July, increasing the rates by 250bps over the
As Central Banks started to get to grips with inflationary pension funds whose holdings were made of 2/3rd long dated
pressures, the European market saw a change in quantitative Gilts. In the lending market, this translated to a rise in weighted course of H2 2022.
easing policies, the TLTRO III programme notably changed average fees of over 7bps for Gilts in H2 2022, with specific
its interest rate calculation and an announcement of early maturities starting to trade with value due to limited liquidity.
repayment dates was made, the first of which was on 23 At the start of September, issues trading warm and special
November 2022. Albeit good for the market long-term, this accounted for 20% of all Gilt revenues in the lending market,
equates to a liquidity squeeze short-term, leading to changes but by the end of September this figure had increased to 80% of
in collateral policies and a continuing strong demand for High revenues, while lendable values dropped to a low of just under
Quality Liquid Assets (HQLA). USD 130bn. By November, the Gilt market had stabilised and
the BoE announced it would initiate the selling of Gilt holdings
Less expected was the Gilt market turmoil amidst a ‘government amid quantitative tightening; selling short and medium dated
crisis’. Fiscal policies of large scale borrowing and tax cuts were issues and unwinding the pandemic monetary stimulus.
attributed to financial instability in the United-Kingdom, with UK
Prime Minister, Liz Truss, stepping down after only two months The rate environment translated to strong yields on debt
of service. The GBP also fell to an almost all-time low vs. USD instruments over the year and corporate bond fees in securities
(1.0726 on 27 September). The Bank of England was forced lending are a reflection of this. The asset class generated over
to intervene, repurchasing approximately GBP 65m of long USD 155m, with average fees of nearly 40bps regionally in
dated Gilts as pressure on the ability of pension funds to meet H2 2022. It surely has been a stellar year for corporate bonds
their margin calls had forced widespread Gilt selling. The drop in securities lending. Unless rate cuts occur as economies and
in bond values was particularly detrimental to Liability Driven inflation slow down – as some market analysts suggest – then
Investment funds (LDI), many of which are owned by final salary the asset class will continue to gather interest.