Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
ETF borrow demand declining from March peak, but still up
YoY
Short squeeze may challenge demand for hard to borrow
equities
Reinvestment returns spike on Fed rate cut
April securities lending revenues totalled $700m, a decline of
14% compared with April 2019. Compared with March, the MoM average daily revenues declined
by 5.6%. Total equity lending revenues, including ETF & ADR,
came in at $519m for April, a 20% YoY decline and 10% MoM decline.
Lower balances and more narrow fee spreads were the general theme
for April, however there were some causes for joy, notably
including sovereign debt and ETF returns.
Short squeezes are a characteristic common to equity market
rallies following significant short-term declines in equity prices.
That has certainly been the case for the rally from the March lows.
The most expensive to borrow US equities outperformed less
expensive to borrow by 4.7% in April; Outside of US the most
expensive to borrow outperformed by just over 5%. While the short
squeeze has been challenging to navigate for long-short funds, it
has so far added to specials balances in the US, which increased
by 22% over the course of April to end the month at $9.5bn.
US equity lending revenues came in at $190m for April, an
increase of 2.7% YoY. A headwind on the horizon for YoY comparison
of US equity returns is the run of IPOs which kicked off with LYFT
on March 29th, 2019. Revenues in the 2nd half of 2019 were 45%
higher than in the first half, which will be a tough act to
follow.
Match Group Inc (MTCH) was the most revenue generating security
globally in April, with $20m in monthly revenue compared with $27m
for the first quarter of 2020. The upswing in returns was primarily
the result of fees averaging 9.45% in April, more than double the
average fee for Q1, however balances also increased by 8%. <span/>
One demand driver of 2019 which sprinted into 2020 before
stumbling in March and April is the Cannabis sector. Equities related to the
nascent industry generated 14% of North American equity revenues in
Q1. That ratio fell to 9% in April, with just over $20m in monthly
revenue, down from $51.6m in January. Given the importance of the
Cannabis sector to Canadian equity lending revenue over the last
year, it's unsurprising that April saw the lowest monthly Canada
equity lending revenue of 2020, down 30% YoY.
Asia equity lending revenues continue to be subdued, with April
revenues of $120m reflecting a 29% YoY decline, matching the 29%
YoY decline in March. The blame for the shortfall is entirely lower
fees, with balances in the region increasing by 4.8% YoY in April.
Asia ETF lending revenues continue to increase, albeit from a
relatively low base, with $2.9m in April revenue reflecting 230%
YoY growth and the most for any month this year.
Equity lending in Europe remains in a downtrend, with $116m in
April revenues reflecting a 41% YoY decline. Wirecard Ag (WDI)
continues to be the most revenue generating security in the region,
with $6.5m in April revenue. The WDI corporate bond has seen
declining borrow balances, though that likely relates as much to
its' being the most expensive to borrow corporate bond globally as
it does to an underlying desire to borrow the bonds.
ETF lending revenues declined 35% compared with the stellar
March return of $53m, however the $34.8m in April revenue does
reflect a 69% YoY increase. The blame for the shortfall is
primarily declining spreads for credit funds. Borrow demand for
credit related ETFs increased in early March, however fees had
already substantially declined by the time of the Fed announcement
on March 23rd, and continued to decline thereafter. While declining
spreads for credit ETFs did have a depressing impact on returns,
average balances are also in decline from the March peak, with the
$62.6bn in avg April balances down 14% MoM.
Corporate bond lending revenues declined with market values in
mid-March and continued to fall throughout April, ending the month
at the lowest level since Q1 2017. April credit lending revenues
came in at $34m, a 33% YoY decline and the lowest for any month of
2020 so far. The decline in returns was broad based, with
investment grade credit lending revenues declining 9% compared with
March, while high yield returns declined 11% MoM. One bright spot
was EUR IG revenues increasing 7.5% MoM compared with March.
Government bond lending continues to deliver increased spread
income, with fee revenues coming in at $143m in April, a 37% YoY
increase; Returns were relatively flat compared with March, -1%
MoM. North American sovereign debt lending revenues came in at
$103m for April, up 2% MoM, while European and Asian issuer
revenues were down MoM 8% and 6%, respectively.
Conclusion:
At the outset of 2020 there was some question about
whether equity special demand of 2019 would persist, while fixed
income appeared moribund, particularly sovereign debt lending. Then
came COVID-19 and the substantial shutdown of the global economy
which led equity and credit markets lower and prompted
unprecedented central bank response. While markets have stabilized,
uncertainty reigns and corporate managers are under pressure to
deliver for a variety of stakeholders. IHS Markit Dividend
Forecasting team anticipate $280bn+ in global dividend reductions
for 2020. That reduction in income makes securities lending spread
and collateral reinvestment returns even more precious in 2020.
Looking forward there are a few drivers that could help returns,
and returns to lendable assets, to increase for the remainder of
2020. A return to relative underperformance on the part of
equity "specials" would help to support borrow demand; The
underperformance of high-fee equities, gross of fees, is one of the
more
stark equity quant factors and has been shown to be
significant for a range buy side strategies. Lifting the bans on
short selling in markets which currently limit the activity would
certainly be supportive of increased demand in those markets, and
therefore increase returns for long investors as well. More clarity
on purchases of credit by the Fed, particularly in high yield,
which to date has appeared to be more messaging than market
involvement, could increase borrow demand for credit and credit
ETFs. Further rate cuts by the Fed could also have a positive
impact on reinvestment returns in the short run, however pushing
the policy rate negative appears unlikely for now.
Stay tuned for monthly revenue updates from IHS Markit
Securities Finance!
Posted 04 May 2020 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
