Fixed Income
October 2019
By Tom Ashton, Product Specialist, DataLend
The first half of 2019 has not been kind to the fixed income market, with total revenue down 30%. Average on-loan balances (-15%), fees (-18%) and utilization (-17%) were all down relative to the same period in 2018. At the same time, there was an increase in supply, as average daily lendable grew from $6.84 trillion in 2018 to $7.01 trillion in 2019.
North America
Fixed income revenue in North America overall was down 32% in H1 due to lower on-loan balances along with lower average fees ($812.4 billion from $915.4 billion and 10.75 bps from 14.08 bps, respectively). Convertible and corporate debt saw the biggest decreases in revenue in the region, down 49% and 27% respectively, although average daily balances were up compared with H1 2018. The decrease is mainly due to lower fees and utilization.
EMEA
Revenue in EMEA was down 26%, grossing $312.6 million in H1 2019. As per the global trends, on-loan balances were down 22% year on year, but average fees and utilization dropped only slightly; fees were down 1 basis point to an average of 19 bps, while utilization dropped from 21% to 18%.
Asia
The fixed income story in Asia follows the same plot as the other regions so far in 2019, with revenue, on-loan balances, fees and utilization falling when compared to the same period last year. The exception has been total lendable, which increased 9% from $288.6 billion in H1 2018 to $313.7 billion in H1 2019. Australia and Japan continued to dominate the supply in the region, accounting for almost 60% of the total availability in Asia.
Here’s Why
The fixed income markets suffered in 2019 as a result of global macro uncertainty, central bank actions, lack of conviction from hedge funds and banks’ decreased demand for high-quality liquid assets (HQLAs) for collateralization purposes.
Historically, a driver of U.S. Treasury balance was the USD/JPY pair trade. Recently there has been a narrowing in the spread on this trade, causing some borrowers to close out these trades completely.
In the U.K. market, Brexit has had a significant impact on specials, and in general, liquidity worries across the market are contributing to a slump in demand.
However, among the ocean of negative news there is one pearl of positivity, and that is in North American agency debt, where revenue was up 13% from $11.1 million in the first half of 2018 to $12.6 million from January through June 2019. Increased revenue was primarily driven by higher fees, which were up 22% year over year.
