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Securities Lending Market Report | December 2023

US

>>> Fixed Income

The back half of 2023 started with a continued sell off in US Treasuries stemming from a disappointing prior quarter tax Fig 8 - S&P Global
collection, a refunding announcement that was expected to show an onslaught of treasury issuance on the horizon, and
stingy inflation and jobs data that signalled that the tightening cycle may not be over. The FED hiked another 25bps in July, North American Government Bond Market Cash vs Non-Cash
bringing their target range to 5.25-5.50%. Rising rates have brought continued shorting opportunities in the Treasury space,
particularly in the on-the-run securities that have seen decreased supply in both lending accounts as well as at the FED’s 620.00
SOMA portfolio, increasing the scarcity bid in certain issues. Flight to quality demand remains strong, both versus cash and 290.00 600.00
non-cash collateral sets. Borrowers remain keen to borrow UST collateral versus various collateral sets including equities,
corporate bonds and other sovereign debt to better improve their capital and funding requirements. Lenders who have 280.00 580.00
270.00
engaged in these trades have benefited. Lending demand for US Treasuries can be seen in its yearly revenue number of over On-Loan vs Cash (Billions $) 300.00 560.00
$900 million for Fiscal Year 2023. The front end has seen a rapid increase in bill supply as the debt ceiling resolution was 260.00 540.00 On-Loan vs Non-Cash (Billions $)
reached in June, creating more collateral for the street to digest, and ultimately driving funding levels higher and creating 250.00 520.00
further dislocations in the very front end of the curve. 240.00 500.00

A “soft landing” (achieving a deceleration in the overall economy As year-end approached, repo rates were driven higher by an 230.00 480.00
while decreasing inflation and avoiding a recession) once increase of supply and a decrease of balance sheet availability as Jul 23 Aug 23 Sep 23 Oct 23 Nov 23 Dec 23
seemed like an impossible task for the Fed as higher interest intra year window dressing was beginning to unwind and dealers Group Balance vs Cash Group Balance vs Non Cash
rates, geopolitical turmoil, the united auto workers strike, looked to shore up their liquidity metrics. This dynamic caused
stubborn inflation and an overheated labour market all weighed an increase in the Fixed Income Clearing Corporation’s (FICC)
on the market. It seemed unlikely that monetary policy was sponsored program, which saw an all-time high above $1 trillion
restrictive enough to improve inflation and market participants and a decrease of the Fed’s RRP programme as money began
pondered what further tightening would do to economic reallocating out to chase higher yielding assets. The drainage
growth. The fourth quarter of 2023 saw a shift in market of the RRP is in full focus and was even mentioned in the latest
sentiment as steady improvement in both headline and core Fed minutes – if the facility is fully drained in the first half of
inflation, easing in the labour market, and steady unemployment the year as many expect, this could mean the end to QT and
rates all put the higher for longer narrative in jeopardy. The most balance sheet runoff to ensure an ample number of reserves in
recent release of the Fed minutes showed that not only are the system and help prevent deterioration in funding markets.
officials in favour of the end of the most aggressive tightening Cleared transactions, both cash and repo, will increase in the
cycle in decades but are also in favour of multiple cuts in 2024. coming years as the SEC adopted amendments to increase risk
The debate remains around the timing and magnitude of the management and clearing in U.S Treasuries. The implementation
pivot as there is variation between Fed members, but the process of this vast market will take time with deadlines of 2025
inclination that we have reached a terminal rate spurred a year- for clearing houses to have infrastructure in place and cash
end rally in both equities and treasuries. trades to clear and 2026 for repo transactions.