Government debt powers growth in 2023 lending revenues
30 May 2023
During 2022, US$1.8 billion in revenues were generated from government bond lending, making it one of the best years to date for the asset class. Matthew Chessum, director of securities finance at S&P Global Market Intelligence, explains the factors driving this vibrant demand for sovereign debt
Image: Shutterstock
Government bond markets have encountered one of the most active and unpredictable environments experienced for many years. Since the global financial crisis, a prolonged period of central bank support, abundant liquidity and low interest rates has suppressed both yields and spreads across this asset class. The emergence of global economies from the grips of the Covid pandemic and the subsequent inflationary pressures have acted as the stimulus for a change in monetary policy and a return to a more normalised interest rate environment.
Over the past 18 months, government bonds in the securities lending markets have been benefiting from this change in market conditions. During 2022, an incredible US$1.8 billion in securities finance revenues were generated by the asset class, making it one of the best years to date for government bond lending. Since January, over US$646 million in revenues have been generated for lenders, which is an increase of 12 per cent over the same period during 2022. With revenues 13 per cent higher during Q1 2023 than in the equivalent period of 2022, the asset class is experiencing a very strong start to the year. Looking at securities finance activity for 2023, government bonds appear to be improving upon the strong performance experienced during 2022 across all geographical regions.
Europe
Average fees for European government bonds hit a monthly average high of 21bps for the first time during November 2022. This fee was maintained through to February 2023 before declining month-on-month to 18bps during April 2023. Revenues reflected these higher fee rates, with an average increase YoY of just over 12 per cent for the January to April period. Over a similar period, utilisation hit highs not seen for many years, peaking at 30.8 per cent during October 2022.
Across Europe, UK (at US$62.9 million), French (at US$48.4 million) and German (US$71.9 million) government bonds continue to generate the highest revenues for lenders. Utilisation in UK gilts remains above 30 per cent, after reaching an all time high of 38.9 per cent during September 2022. Average fees for UK gilts reached 32bps during November 2022 and currently equal the European government bond average of 19bps.
During 2022, Italian government bonds increased in popularity among borrowers. Utilisation averaged 24.29 per cent over 2022 (compared with 19.26 per cent in 2021, and 14.16 per cent in 2020) but peaked at 30.65 per cent during the month of November. Average fees also stood at a multi-year high during April 2023 of 14bps, after averaging 10 bps during 2022, 7bps in 2021 and 8bps in 2020.
Greek government bonds have also been making a comeback over the past year. This may be the result of market participants taking a view following the recent elections or end investors expecting some reversion now that the country’s 10-year yield is lower than Italy’s. This may also be down to borrowers becoming more comfortable with accepting the country’s debt as collateral, following years of fiscal tightening and the possibility that the country could become investment grade by the end of the year.
Balances in Greek government bonds increased 38 per cent during April to just under US$200 million. As balances have increased, average fees have been declining but still stand at a very respectable 74bps (with a 100bps average for Q1 and a 2022 average of 115bps). Utilisation of Greek government bonds has been increasing month-on-month during 2023 and currently stands at 6.08 per cent. Q1 average balances were 93 per cent higher YoY — relative to 4.55 per cent for 2022, 3.48 per cent for 2021 and 1.74 per cent for 2020).
Americas
Across the Americas, government bond markets continue to be dominated by the US$24 trillion US treasury market. Discussions regarding the US debt ceiling have recently been increasing volatility in volume-weighted average fees as investors continue to pay close attention to ongoing discussions regarding the debt ceiling (Fig 1).
Lending in US treasuries generated US$941 million in revenue during 2022, which is another all-time recent high — situated against recent revenues of US$898.3 million in 2021 and US$865.2 million in 2020. During Q1 2023, revenues increased 9.1 per cent YoY to US$238 million — with US$319.6 million being generated year-to-date.
Fig 1: Volume-weighted average fee (VWaF) for government bonds by region
Average fees are reflective of this increase in revenues. Average fees hit 20bps during December 2022 for the first time since April 2020, when strong demand generated by the onset of the Coronavirus pandemic increased the average fee. Utilisation has been decreasing across US treasuries after hitting a monthly average high of 28.05 per cent during 2022 (Fig 2). Utilisation fell below 20 per cent to 19.61 per cent in April 2023 for the first time since February 2020.
A similar pattern has been emerging across Canada. Utilisation fell to 18.81 per cent during April, marking a multi-year low. However, average fees maintained a healthy 15bps throughout 2023, which is again a multi-year high. Balances over the Q1 period were 16 per cent lower YoY. Year-to-date revenues have risen to US$50.8 million, relative to US$47 million during the same period in 2022.
Fig 2: Government bond utilisation by region
Asia Pacific
Across the Asia Pacific region, the market remains dominated by a handful of countries. Average lending fees for government bonds have been in decline across the region, after hitting an impressive 27bps in January this year. The elevated average fees have translated into stronger revenues for lenders. US$96.7 million was raised during 2022, which was significantly higher than the US$56.2 million generated in 2021 and US$34.1 million in 2020. Revenues during 2023 have so far extended this trend, illustrated by an average increase of 44 per cent month-on-month.
A lack of liquidity in Japanese government bonds — caused by the ongoing yield range regulation used by the central bank of Japan to control bond prices — continues to push average fees higher, hitting an all-time high of 32bps during January. Fees have subsequently declined month-on-month to 25bps during April. Revenues produced by JGBs continue to outperform, generating annual revenues of US$54.5 million during 2022 — which compares favourably with the US$46.4 million raised in 2021 and US$22.8 million in 2020.
Australia is also a supplier of high-quality liquid assets within the region. Average fees have increased significantly over the past year, starting 2022 at 9bps and hitting 22bps during January 2023. Utilisation has been declining, however, after reaching an all time high of 32.23 per cent during July 2022.
South Korean government bonds have started to become more popular with borrowers. The country has a strong credit rating and its bonds are increasingly recognised as high-quality liquid assets. Utilisation surpassed 5 per cent for the first-time during September 2022 and average fees have remained over 20bps during the entirety of 2023.
As we have seen, government bonds continue to perform well, despite the many challenges that the market has been facing. Revenues remain robust across all markets owing to elevated average fees. The specials market continues to thrive across jurisdictions, owing to the hawkish interest rate environment. Based on current market trends, government bonds are likely to remain one of the best performing asset classes of 2023 and may even surpass the remarkable returns generated during 2022.
Over the past 18 months, government bonds in the securities lending markets have been benefiting from this change in market conditions. During 2022, an incredible US$1.8 billion in securities finance revenues were generated by the asset class, making it one of the best years to date for government bond lending. Since January, over US$646 million in revenues have been generated for lenders, which is an increase of 12 per cent over the same period during 2022. With revenues 13 per cent higher during Q1 2023 than in the equivalent period of 2022, the asset class is experiencing a very strong start to the year. Looking at securities finance activity for 2023, government bonds appear to be improving upon the strong performance experienced during 2022 across all geographical regions.
Europe
Average fees for European government bonds hit a monthly average high of 21bps for the first time during November 2022. This fee was maintained through to February 2023 before declining month-on-month to 18bps during April 2023. Revenues reflected these higher fee rates, with an average increase YoY of just over 12 per cent for the January to April period. Over a similar period, utilisation hit highs not seen for many years, peaking at 30.8 per cent during October 2022.
Across Europe, UK (at US$62.9 million), French (at US$48.4 million) and German (US$71.9 million) government bonds continue to generate the highest revenues for lenders. Utilisation in UK gilts remains above 30 per cent, after reaching an all time high of 38.9 per cent during September 2022. Average fees for UK gilts reached 32bps during November 2022 and currently equal the European government bond average of 19bps.
During 2022, Italian government bonds increased in popularity among borrowers. Utilisation averaged 24.29 per cent over 2022 (compared with 19.26 per cent in 2021, and 14.16 per cent in 2020) but peaked at 30.65 per cent during the month of November. Average fees also stood at a multi-year high during April 2023 of 14bps, after averaging 10 bps during 2022, 7bps in 2021 and 8bps in 2020.
Greek government bonds have also been making a comeback over the past year. This may be the result of market participants taking a view following the recent elections or end investors expecting some reversion now that the country’s 10-year yield is lower than Italy’s. This may also be down to borrowers becoming more comfortable with accepting the country’s debt as collateral, following years of fiscal tightening and the possibility that the country could become investment grade by the end of the year.
Balances in Greek government bonds increased 38 per cent during April to just under US$200 million. As balances have increased, average fees have been declining but still stand at a very respectable 74bps (with a 100bps average for Q1 and a 2022 average of 115bps). Utilisation of Greek government bonds has been increasing month-on-month during 2023 and currently stands at 6.08 per cent. Q1 average balances were 93 per cent higher YoY — relative to 4.55 per cent for 2022, 3.48 per cent for 2021 and 1.74 per cent for 2020).
Americas
Across the Americas, government bond markets continue to be dominated by the US$24 trillion US treasury market. Discussions regarding the US debt ceiling have recently been increasing volatility in volume-weighted average fees as investors continue to pay close attention to ongoing discussions regarding the debt ceiling (Fig 1).
Lending in US treasuries generated US$941 million in revenue during 2022, which is another all-time recent high — situated against recent revenues of US$898.3 million in 2021 and US$865.2 million in 2020. During Q1 2023, revenues increased 9.1 per cent YoY to US$238 million — with US$319.6 million being generated year-to-date.
Fig 1: Volume-weighted average fee (VWaF) for government bonds by region
Average fees are reflective of this increase in revenues. Average fees hit 20bps during December 2022 for the first time since April 2020, when strong demand generated by the onset of the Coronavirus pandemic increased the average fee. Utilisation has been decreasing across US treasuries after hitting a monthly average high of 28.05 per cent during 2022 (Fig 2). Utilisation fell below 20 per cent to 19.61 per cent in April 2023 for the first time since February 2020.
A similar pattern has been emerging across Canada. Utilisation fell to 18.81 per cent during April, marking a multi-year low. However, average fees maintained a healthy 15bps throughout 2023, which is again a multi-year high. Balances over the Q1 period were 16 per cent lower YoY. Year-to-date revenues have risen to US$50.8 million, relative to US$47 million during the same period in 2022.
Fig 2: Government bond utilisation by region
Asia Pacific
Across the Asia Pacific region, the market remains dominated by a handful of countries. Average lending fees for government bonds have been in decline across the region, after hitting an impressive 27bps in January this year. The elevated average fees have translated into stronger revenues for lenders. US$96.7 million was raised during 2022, which was significantly higher than the US$56.2 million generated in 2021 and US$34.1 million in 2020. Revenues during 2023 have so far extended this trend, illustrated by an average increase of 44 per cent month-on-month.
A lack of liquidity in Japanese government bonds — caused by the ongoing yield range regulation used by the central bank of Japan to control bond prices — continues to push average fees higher, hitting an all-time high of 32bps during January. Fees have subsequently declined month-on-month to 25bps during April. Revenues produced by JGBs continue to outperform, generating annual revenues of US$54.5 million during 2022 — which compares favourably with the US$46.4 million raised in 2021 and US$22.8 million in 2020.
Australia is also a supplier of high-quality liquid assets within the region. Average fees have increased significantly over the past year, starting 2022 at 9bps and hitting 22bps during January 2023. Utilisation has been declining, however, after reaching an all time high of 32.23 per cent during July 2022.
South Korean government bonds have started to become more popular with borrowers. The country has a strong credit rating and its bonds are increasingly recognised as high-quality liquid assets. Utilisation surpassed 5 per cent for the first-time during September 2022 and average fees have remained over 20bps during the entirety of 2023.
As we have seen, government bonds continue to perform well, despite the many challenges that the market has been facing. Revenues remain robust across all markets owing to elevated average fees. The specials market continues to thrive across jurisdictions, owing to the hawkish interest rate environment. Based on current market trends, government bonds are likely to remain one of the best performing asset classes of 2023 and may even surpass the remarkable returns generated during 2022.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Íø±¬³Ô¹Ï Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Íø±¬³Ô¹Ï Finance Times
