Data Explorers on corporate bond borrowing: demand is up

An article last week from Data Explorers, Arbitrage driving borrowing of corporate bonds, reminded us that the repo and sec lending world these days doesn’t only revolve around collateral management, regulatory changes and “safe assets.” Sometimes it is about enabling traders to do relative value arbitrage, taking out yield curve distortions with the help of good ole’ fashioned securities lending (and repo too). Data Explorer’s article on corporate bonds is worth a read.

They note that the volume (they track) of corporate bonds borrowed has gone up by 13% to $186 billion and program utilization to 6.63% of supply. With corporate issuance strong, there are opportunities to short corporate bonds expensive on the curve, hedge, and wait out curve normalization. Of course to do this you need to borrow the expensive bond. They gave examples from ArcelorMittal, Volkswagen, and Ford.

DE observes “…We see a pronounced increased demand to borrow mispriced lines as investors seek to profit until the yield falls in line with similarly dated listings…” This should not be much of a surprise. We would have liked to see information on how the borrowing costs (and not just utilization) behaved and go farther in the analysis. Did the sec lending rates get squeezed as demand for borrowing picked up? Was there a “tipping point” where once a certain percentage of supply was borrowed, the rates became more punitive? How long did it take for bonds to come back into line once borrowing utilization went up? Are sec lending and repo desks marrying the curve & Dataexplorers utilization data and extracting market “tea leaves”, then positioning themselves in anticipation of increasing or decreasing demand to borrow or lend the paper? 

A link to the post is here.

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