Demand for interest rate sensitive sectors has soared across
prime brokerage desks since Donald Trump’s
election victory in November.
The units, which cater to hedge funds, have boosted their
borrowing of market segments strongly correlated to rising
It follows the first US rate hike in a decade in December
shortly after Trump's presidential win.
Members of the Federal Reserve have since predicted that
rates will move higher and more quickly than expected under the
new administration in 2017 and beyond.
Michael Saunders, North American head of trading &
investments and securities lending at BNP Paribas Securities
Services, says the market has witnessed "tremendous demand" in
broad segments impacted by higher rates, particularly finance
and utilities companies.
"Despite the market repricing itself to reflect more rate
hikes than anticipated, the majority of the flows witnessed by
the desk were from prime brokers seeking exposure to the broad
markets rather than specific directional names," he told Global
Saunders says demand for exchange funds in December was a
testament to these flows as borrowers sought cheap
exposure through ETF's to the market advances throughout
November and early December.
"Virtually all ETF's linked to a broad market experienced
increased levels of demand as the Trump effect advanced markets
"In addition, ETF's linked to technology (DFT), consumer
discretionary (FXD), REITs (SRG) utilities (FXU) and telecom
(VOX) experienced heavy demand."
Politically sensitive regions such as Turkey, Chile, Japan,
Brazil, Taiwan, Poland and Austria also continue to be in
demand to borrow.
Saunders reckons strong demand for Vanguard FTSE Emerging
Market (VWO) in recent months "probably best describes" the
flows and trends of accessing cheap exposure to monetize the
Meanwhile, the credit markets continued to offer tremendous
opportunity for cash collateral based accounts.
"The continuous widening of Libor versus the Overnight Bank
Funding Rate (OBFR) provided incentive for accounts to extend
duration of their portfolio while significantly achieving
yields in excess of 1.25% in the six month maturity space,"
"Similar opportunities existed throughout the month for
investors willing to place their loan proceeds into a prime
money market fund with the spread between government funds and
prime funds widening from 10 basis points to nearly 22 basis
points at month end."