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Global Government Bond At 31 December 2019, there was circa €980 billion of
government bonds on-loan, which represented a 3%
Markets in Focus increase from the €955 billion reported as at 30 June
2019 (see Fig 7). The second half of 2019 was very much
shaped by events in the repo markets, where problems
associated with market liquidity persisted.

In mid-September, the US repo markets saw significant
outflows of cash liquidity just as the demand to fund
long positions increased. That mismatch drove overnight
repo rates to 10% on 17 September, from about 2% the
week before. Commentators have offered a number of
explanations for this, including the demands on cash bal-
ances to fund quarterly tax payments, as well as new US
Treasury issues increasing dealers inventory. However,
behind what appear to be short, tactical issues are per-
haps longer concerns.

As central banks have unwound their QE programs by
reducing their holdings of government bonds, this has
effectively drained cash liquidity from the short-term
money markets. In North America, this has led to the Fed
intervening to provide short-term liquidity, which many
see as the return of QE in all but name. The other factor
that is cited by many, is the post-crisis regulatory regime
that is designed to curb risk taking and thereby disin-
centivise banks to support trading liquidity, particularly
across critical regulatory reporting dates. Some analysts
have also pointed to the increasing use of the Treasury
repo market by hedge funds as a contributing factor.

The securities lending markets were not immune to the
volatility being experienced in the repo markets, with
the rebate paid on cash collateralised government bond
loans spiking at over 400 basis points on 17 September.

As the liquidity issues in the repo market played out,
on-loan balances fell from a six month high in the late
summer, to €965 billion in mid-September. Whist we did
see something of a recovery late September, on-loan bal-
ances fell sharply in October. Here, other factors may have
been shaping trading patterns. As the spread between
US Dollar and Japanese Yen widened significantly in
October, borrowers appeared to return US Treasury loans

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