Unconstrained bond funds vs. securities lending? (Premium Content)

A new and complex dynamic has emerged in securities finance, whereby institutional investors are pulling assets from long-only fixed income portfolios in their agency securities lending programs. These funds are going into unconstrained fixed income portfolios (or nontraditional bond funds), now a US$153 billion investment category, up from US$51 billion in 2011, according to Morningstar. This multi-faceted issue moves the responsibility for financing around and increases risk, hopefully with the outcome of also increasing rewards. It also brings up questions in institutional investor thinking about the process and policies in their securities lending programs.

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