A version of this blog post originally appeared on Forbes.
It started with tulips, went through corn and technology, and most recently hit property and cheap money. I am of course talking about bubbles. Not the type children play with and people write songs about, but the kind that, when they burst, can cause financial havoc.
The word “bubble” is bandied about all too often. There seems to be a constant fear that any price rise could become a short-sharp-shock. The latest in this long line up are bonds. Junk bonds, investment-grade corporates and even U.S. Treasuries – the classic ‘no-risk’ investment option – all seem to be reaching new heights.
Low interest rates and stimulus efforts from the U.S. government and Federal Reserve have brought U.S. yields to record lows. Add to this a fast flow of cash away from riskier equities and into the perceived safe haven of bonds, and maybe there is a case to be made that these fixed income securities are starting to get overheated.
Is this a bubble? If prices slowly retreat rather than burst, overheating like this isn’t usually defined as a bubble. So then, does this increase in demand for bonds look set to pop?
This blog post was taken from the Astec Analytics Securities Lending Focus for March 2013.
Last month I stated that I wanted to find some good news to include in Focus, but I am sorry to say that I have failed on this occasion. More doom and gloom could well be on the way.
In original drafts of the Financial Transaction Tax, securities lending and repo transactions had been exempted – in the latest drafts, this has changed, and a tax of 0.1% will be applied to one leg of each trade – i.e. the first exchange of lent securities and collateral will attract a 0.1% levy on both parties, but the return of the loan will be exempt.
A certain excitement spread through the securities lending market during August 2012. A new set of guidelines from ESMA (European Securities and Markets Authority) that govern securities lending for UCITS (Undertakings for Collective Investments in Transferable Securities) and ETFs (Exchange-Traded Funds) were published. These guidelines, due to come into force in February 2013, had the laudable objective of strengthening and harmonizing regulatory practices, but one particular aspect was jumped on and, unfortunately, misinterpreted.
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