Global Investor/ISF invited securities finance
professionals to a roundtable in Boston recently. During the
discussion the industry experts offered their views on the
impact of rising interest rates and the change of
administration in the US. Here's what they said.
Nancy Allen, DataLend: Securities lenders
are keeping a close watch on the US political landscape. In the
run up to the election, fees to borrow biotech stocks increased
following negative rhetoric from one of the candidates.
However, the election results meant those shorts were closed
out, and fees dropped off significantly. On the other hand,
solar power companies were under pressure immediately following
the election. DataLend looked at 14 of the largest solar names
in the immediate aftermath of the election. Average fees to
borrow went from 160bps to 191bps over the course of a few
Brendan Eccles, Scotiabank: Although still
too early to tell, I’m surprised there
hasn’t been more volatility. Tax cuts and
reforms could be perceived as being very positive. Similarly
protectionist policies could be viewed as negative for the
economy. It’ll be interesting to see how it
Ori Porat, Fiducia Optime (independent
consultant): This goes way beyond our industry. As per
Newton’s third law, for every action there will be
a reaction. The divisive and uncompromising rhetoric in
Congress for the last 20 years will mean there will be fierce
opposition and lesser chance of bipartisanship on any issue
whatsoever, so the question will be whether the administration
can move past political gridlock.
Bill Smith, JP Morgan: It is too soon to say
how the new US presidential administration may impact the
securities lending business, but this business has
historically demonstrated the ability to adapt to change as
Josh Gray, Russell
Investments: We will begin to see President
Trump’s actual fiscal policies after he has
settled into office. There could be more market volatility. For
example, he appears to be sceptical of alternative energy, so
we could see some lending demand driven from that
The US finally hiked interest rates at the end of
2016. What opportunities will rising rates bring?
McDonald: We are constructive on
opportunities available to clients this coming year in the US
cash market, depending on their reinvestment guidelines. A
positively sloping yield curve should be a benefit in addition
to the continued impact from the recent US money market reform
that has reduced the level of investment in the prime money
market space, which should continue to make assets in that
space cheaper for the clients that remain.
Smith: Participants have to be cautious.
Rising interest rates aren’t a panacea for low
spreads. The two aren’t entirely connected.
Assuming that because rates are going up spreads will as well
is too simplistic. A potential benefit of interest rates
rising is that it may create more volatility, which means
there are more directional trades. Rising rates may produce
opportunities, but that’s as much about the cash
collateral investment strategy of the investor as it is about
the pace at which rates increase. In the past, rates rising
were challenging for securities lending earnings –
very few people remember that.
Allen: There is likely to be a greater
search for yield, which then sets trading strategies.
We’ve seen a 17% increase in our fixed income flow
through NGT from the start of November, which is unusual.
Toward the end of the year, fixed income flow normally
declines. We believe the increased activity could be a result
of short strategies in the market ahead of interest rate