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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.
All data and sources Columbia Threadneedle Management Limited, as at 30 June 2024 and Valid to: 30 September 2024
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By the third quarter, markets reached the point of tariff fatigue with even threats of tariffs on upholstered furniture causing barely a ripple. Instead, freed from that tyranny, investors were able to focus on fiscal sustainability and potential concerns therein. This theme was global in nature, causing curve steepening (where yields at longer tenors rise more than those in shorter tenors) in the US, Europe (driven by France) and of course the UK. The UK’s strict fiscal rules and uneasy coalition between the left and the hard left exacerbated fiscal concerns. It is anticipated that there is a significant fiscal black hole to be dealt with in the upcoming Budget on 26th November, yet previous attempts by the Labour government to wield spending cuts have come to naught. Therefore, the market’s expectation is that the burden will fall heavily upon increased taxation, and particularly the likelihood of breaking a manifesto pledge not to raise taxes on working people, meaning VAT, income tax or employee national insurance contributions. Whilst other wealth or stealth taxes have been floated through media leaks, further tinkering around the edges simply raises the possibility of additional tax hikes at the next juncture. Depending on the structure of the tax hikes it could still lead to increased short-term borrowing, for example if they choose to freeze the income tax thresholds. Recent comments by Andy Burnham, a past and increasingly more likely future Labour leadership candidate, suggesting that they should ignore the bond markets were unhelpful. It is generally expected that higher taxation limits the growth potential, meaning that a Budget that focuses purely on increasing taxes and not spending cuts could be viewed negatively by the bond market. Despite inflationary pressures, the Bank of England cut the base rate to 4% in August; however, further cuts appear in the balance.
The market’s view of where long-term rates could move to in the future is encapsulated in forward rates. The chart below shows where the six-month SONIA swap rate is currently (spot) and at various forward rates out to five years. As can be seen from the chart, markets are exhibiting a flattening effect, with expectations that further cuts in this cycle will be limited and the start of the rate hiking cycle will be imminent. Persistent inflation needs to be weighed against potential support needed for the economy by the BoE in their deliberations. One-year forward rate expectations have risen by 0.23% within the last three months.
Figure 1: Six-month SONIA rate
Source: Barclays Live, as at 30th September 2025
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. Repo costs are slowly creeping upwards as quantitative tightening continues to drain liquidity from the market. The Bank of England prefers to use its repo facilities to support market liquidity and bank reserves and usage of the short-term facility reached a record £87.1bn at the end of Q3. Through judicious use of axes and netted repo opportunities, Columbia Threadneedle Investments were able to access attractively tight repo spreads, thereby keeping the costs incurred by our clients down. Recent repo pricing on special bonds extended to SONIA + 0.04%.
Figure 2: Spread to SONIA
Source: Columbia Threadneedle Investments, as at 30th September 2025
In September, the Bank of England released a consultation paper regarding the structure of the repo market. Recent events such as the March 2020 “dash for cash” at the start of the COVID pandemic put strain on the repo markets, such that some participants were unable to obtain requisite funding. Further investigation into such points of market stress was undertaken in the system-wide exploratory scenario (SWES) led by the Bank of England. The paper aims to investigate potential reforms to the market which could enhance the resilience of the repo market. There are two main areas of focus: greater central clearing of repos and/or minimum haircuts for bilateral repo transactions. There is much to consider within this exploratory discussion, both in terms of potential reforms and how they may impact the market and the consequences therein. We will be engaging with industry bodies and the Bank of England on this topic.
Credit Repo
Following the gilt crisis in 2022, we are seeing interest from clients in credit repo and an appetite from more and 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[1]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 total return swaps 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[1]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.
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 0.27% higher than the repo (also as a spread to six-month SONIA). 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 Bank of England 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 over £2bn of gilts, there is a concentration limit of £500m 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 developing facility.
