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US sec finance industry wary of Trump and rising rates

01 February 2017

Market participants preparing for life under new presidential administration and rising rate environment

Read more: securities lending Trump

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 days.

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 plays out.

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 needed.

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 sector. 

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 hikes.

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