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Repo rates are expressed relative to SONIA, and the chart below displays the average repo rates that we have achieved over the past four quarters for three, six, nine and 12-month repos, shown as a spread to average SONIA levels at the time. The volatility and market uncertainty that resulted from the mini-Budget also weighed upon funding markets, particularly for shorter dated trades as can be seen from the achieved spreads below. Note that during the fourth quarter of 2022 no repos were traded with a 12m tenor so the chart reflects the previous quarter’s value.
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The secondary impact of the mini-Budget crisis centred around collateral and the velocity of movement; rather than a lack of balance sheet for repo funding (a la March 2020). Yet, the difficulties around collateral substitutions and settlements did in many cases prompt a review by individual banks’ credit officers, resulting in a temporary reduction or hiatus in repo balance sheet provision in some cases. Once these reviews were completed balance sheet availability opened up again – some with the addition of haircuts to provide additional protection to the bank. Of course, the momentous lack of certainty in the future path of interest rates also impacted the typical repo spread to SONIA as trading a fixed rate forced the banks to take a conservative view on where yields could reach.
Indicative current pricing shows leverage via gilt TRS for a six-month tenor is very bank dependent but is on average similar to repo – this depends on the bank’s view of the repo market and whether they are impacted by Net Stable Funding Ratio regulations (NSFR). Part of the reason for higher costs for TRS is a reflection of the lack of straight-through-processing available. Columbia Threadneedle are engaging with various market providers and participants to redefine TRS and the way it is traded and confirmed.
The monetary loosening cycle continued its momentum, with the US Federal Reserve cutting their rate by 1.5% over the quarter (after a slow start to the year) and the Bank of England also completing their much-anticipated Christmas cut of 0.25%, bringing the Base Rate to 3.75%. This was in contrast to the ECB, who remained on hold throughout the fourth quarter with some market participants holding the belief that the next move will be a rate increase as early as the first half of 2026.
All data and sources Columbia Threadneedle Management Limited, as at 30 June 2024 and Valid to: 30 September 2024
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The Iran conflict and the impact of the closure of the Strait of Hormuz on energy prices dominated the second quarter. As the blockade persisted, concerns grew around downstream effects on inflation and growth, creating a difficult path for central banks as they considered the need for rate hikes to dampen inflationary pressures countered by recessionary risks.
Market pricing of rate hike expectations remained volatile and reflective of news flow, yet the European Central Bank (ECB) took the plunge and raised the deposit rate in June by 0.25% to 2.25%. This was made possible by their prior rate cutting actions putting them ahead of the curve. In the US the new chair of the Federal Reserve (Fed), Kevin Warsh, took a hawkish stance – unexpected by some who felt the pressure of President Trump’s desire for lower rates. Yet this stance did not translate to a change in the Fed Funds rate.
In the UK, the Governor of the Bank of England (BoE) countered expectations by stating that an ‘active’ hold was already a tightening of monetary policy given the start of year expectations for multiple rate cuts. Of course, in the UK there is more to contend with than overseas geopolitics. The crisis at the heart of the Labour party played out as presumptive prime minister Andy Burnham was elected as MP for Makerfield in June. After committing to fighting any rivals, Prime Minister Keir Starmer bowed to internal pressure and resigned, with Burnham being unchallenged in the leadership race at the time of writing. Whilst Burnham has bound himself to the fiscal rules in a measure designed to placate the gilt markets, his policies seem difficult to square with that approach. Desires to massively expand council house building and to renationalise industries are not expected to be cheap. Much market commentary and gilt volatility has surrounded his potential choice of chancellor, with Ed Miliband emerging as the bookies’ favourite – and also as the individual causing the most gilt market nervousness.
The market’s view of where long-term rates could move to in the future is encapsulated in forward rates. Figure 1 shows where the six-month SONIA (Sterling Overnight Index Average) swap rate (spot) is currently at, and at various forward rates out to five years. As expectations of an end to the Iran conflict rose, so the pricing of rate hikes were rowed back. One-year forward rate expectations have fallen by 0.29% over the quarter. This move belies the volatility that was experienced in rate expectations during the quarter.
Figure 1: Six-month SONIA rate
Source: Barclays Live, as of 30 June 2026
Repo rates are expressed relative to SONIA, and Figure 2 displays the average repo rates achieved over the past four quarters for three, six, nine and 12-month repos, shown as a spread to average SONIA levels at the time. The volatility of SONIA levels bears mentioning here, but despite that experienced spreads to SONIA decreased over the quarter. We describe the spread to SONIA as a key metric in the cost of funding, but the overall achieved rate is also important. We are able to adjust our repo exposure across maturities to reflect opportunities or costs within the market pricing for rate expectations. Across the majority of the quarter there were multiple rate hikes priced into the market, thus raising the overall SONIA level. These expectations were overdone and as a consequence around 80% of the repos entered into were concentrated at the shorter tenors. As rate hike expectations normalised towards the end of the quarter, we were able to extend the terms of repo transactions to balance roll risk with appropriate levels.
Figure 2: Spread to SONIA
Source: Columbia Threadneedle Investments, as of 30 June 2026
In our previous quarterly update we discussed the BoE’s response to the repo market stability consultation paper. Since April there have been further developments, namely an article in the Financial Times suggesting that the Bank will introduce mandatory minimum haircuts in a bid to limit hedge fund leverage. This caused some consternation in markets as hedge funds are major contributors to market liquidity and sparked doomsayers to immediately predict higher yields as a consequence. However, without further details it is hard to predict the impact on funding and gilt markets. What it does indicate, however, is that actions to promote repo market stability are still very much on the agenda for the BoE and thus we can expect more news on this front.
In a busy quarter there were other announcements of note, firstly that LCH intends to introduce a 25% minimum cash requirement for margin. This will primarily impact banks as they will need to fund additional cash collateral, using up balance sheets with estimates varying from £10 billion-£40 billion. Secondly, on 7 July the long-awaited Financial Stability Report was released. Market expectations centred around a relaxation to the leverage ratio framework governing requisite capital buffers, which in turn would provide more capacity for banks to buy gilts and support repo market activity. In the end the FSR underwhelmed expectations with a consultation to ease the leverage ratio framework rather than implement immediate change. With a number of references to gilt repo market resilience, this potentially implies a limited pass-through to an increase in repo provision.
Credit Repo
Following the gilt crisis in 2022, we are seeing interest from clients in credit repo, and an appetite from more banks to support the same. Credit repo allows portfolios with directly held credit to raise cash to support hedging without selling their credit once their gilt positions are depleted. Pricing is highly bank and bond dependent and as a corollary can also be ‘special’ or in high demand. Specials in the corporate bond market are typically fleeting rather than persistent, as is seen in the gilt market, and as such credit repo should be thought of as a short-term contingency solution rather than a long-term funding tool. However, it is a beneficial addition to the toolbox and something we are putting in place for relevant portfolios. It has now grown from a niche offering to one with relatively widespread availability; however, pricing and appetite varies considerably, necessitating engagement to ensure the appropriate access to counterparties in the event of credit repo being needed. An alternative to credit repo is to margin gilt repo with corporate bonds; however, for this to have use in a crisis it means paying the cost of the less liquid collateral on an ongoing basis, thereby increasing the overall cost of funding in the portfolio.
Alternate Funding
Repo funding generally remains cheaper for creating leveraged exposure to gilts over the lifetime than the equivalent total return swap (TRS), and so continues to be used within our LDI portfolios. However, pricing for TRS can be very bond specific and where the bank counterparty can obtain an exact netted position, the rate can be extremely competitive. TRS can be longer dated, with maturities ranging from one to three years, and even five years, as compared to repo, which typically vary in term from one to 12 months. Hence, TRS can be beneficial for locking in funding costs for longer and for minimising the roll risk associated with shorter-term repo contracts. On the other hand, repo facilitates tactical portfolio adjustments more easily and tends to be slightly cheaper.
We ensure portfolios have access to both repo and TRS for leveraged gilt funding, so we can strike the right balance between cost, flexibility and minimisation of roll risk. It is essential to maintain a range of counterparties to manage the funding requirements of a pension fund. We have legal documentation in place with a diversified suite of 24 counterparties for GMRA (Global Master Repo Agreement) and ISDA (International Swaps and Derivatives Association).
Indicative current pricing shows leverage via gilt TRS for a six-month tenor is very bank dependent, but is on average similar to repo – although this depends on the bank’s view of the repo market and whether they are impacted by Net Stable Funding Ratio regulations (NSFR). Part of the reason for higher costs for TRS is a reflection of the lack of available straight-through-processing. At Columbia Threadneedle we are engaging with various market providers and participants to redefine TRS and the way it is traded and confirmed.
Another way to obtain leverage in a portfolio is to leverage the equity holdings via an equity total return swap (or equity futures). An equity TRS on the FTSE 100, where the client receives the equity returns, would indicatively price around 0.57% higher than the repo (also as a spread to six-month SONIA). This is indicative of a current squeeze on equity funding. Clearly, this pricing can vary considerably from bank to bank and at different times due to positioning, which gives the potential for opportunistic diversification of leverage.
Contingent NBFI Repo Facility (CNRF)
We welcome the efforts of the BoE to create a repo facility for Non-Bank Financial Institutions (NBFIs) – known as the Contingent NBFI Repo Facility (CNRF). In January the Bank of England released more details of the facility and eligibility criteria. At the outset the client or fund must own more than £2 billion of gilts, there is a concentration limit of £500 million of a specific gilt, and each client has a borrowing limit of 50% of gilt holdings rounded to the nearest billion. Participants will need to pay an annual fee for access as well as committing to participate in periodic test trades and providing regular information to the Bank. Technically, the facility will be structured as a secured borrowing arrangement rather than a traditional repo, so investors will need to ensure they have the appropriate permissions for regular borrowing to use the facility. Please get in touch if you would like to know more about this facility.
